Big Oil may have to break dividend taboo as debt spirals

Chevron was the only one to reduce its debt last year. (Reuters/File)
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Updated 26 March 2020

Big Oil may have to break dividend taboo as debt spirals

  • Shell prides itself on not cutting its dividend since the 1940s, but some investors think that might soon change

LONDON: The world’s biggest oil and gas firms should break an industry taboo and consider cutting dividends, rather than taking on any more debt to maintain payouts as they weather the fallout from the coronavirus pandemic, investors say.

The top five so-called oil majors have avoided reducing dividends for years to keep investors sweet and added a combined $25 billion to debt levels in 2019 to maintain capital spending, while giving back billions to shareholders.

The strategy was designed to maintain the appeal of oil company stocks as investors came under increased pressure from climate activists to ditch the shares and help the world move faster toward meeting carbon emissions targets.

Now this strategy is at risk. Oil prices have slumped 60 percent since January to below $30 a barrel as demand collapsed because of the pandemic and as a battle for customers between Saudi Arabia and Russia threatened to flood the market with crude.

“Long term, it is appropriate to cut the dividend. We are not in favor of raising debt to support the dividend,” said Jeffrey Germain, a director at Brandes Investment Partners, whose portfolio includes several European oil firms.

The combined debt of Chevron, Total, BP , Exxon Mobile and Royal Dutch Shell stood at $231 billion in 2019, just shy of the $235 billion hit in 2016 when oil prices also tumbled below $30 a barrel.

Chevron was the only one to reduce its debt last year.

The latest collapse in oil prices has sent energy companies reeling, just as they were recovering from the last crash, which saw crude plummet from $115 a barrel in 2014 to $27 in 2016.

Companies from Exxon to Shell have announced plans to cut spending and suspend share buyback programs to balance their books and prevent already elevated debt levels from ballooning.

None has announced any plans to cut dividends so far.

Shell, which paid $15 billion in dividends last year, has never cut its dividend since the 1940s. This week it announced plans to slash capital spending by $5 billion.

But with the highest debt pile among rivals of $81 billion at the end of 2019 and an elevated debt-to-capital ratio, known as gearing, some investors say Shell might have to halve its dividend.

“The measures taken by Shell seem to be sufficient but, over time, if Shell (for instance) does not spend enough capital expenditure then production will start to fall and the underlying cash flow will not be sufficient to sustain the dividend long term,” said Jonathan Waghorn, co-manager of the Guinness Global Energy Fund.

Even if oil prices recover to the low $40s a barrel, oil majors’ debt would rise to levels that are too high by 2021, said Morgan Stanley analyst Martijn Rats.

“Much remains uncertain, but if commodity markets evolve as expected, we think European majors will start to reduce dividends in the second half of 2020,” Rats said.

BP, which last cut its dividend in the wake of the 2010 Deepwater Horizon rig explosion, has yet to announce a detailed plan to weather the crisis. BP declined to comment.

“Given all the negatives, I see no long-term downside to cutting the dividend temporarily and, once circumstances change, raise it accordingly,” said Darren Sissons, portfolio manager at Campbell, Lee & Ross, speaking about major oil companies.

The dividend yield — the ratio of the dividend to the share price — on oil company stocks has soared in recent weeks following the collapse in crude prices, hitting levels not seen in decades.


Dubai counts on pent-up demand for tourism return

Updated 11 July 2020

Dubai counts on pent-up demand for tourism return

DUBAI: After a painful four-month tourism shutdown that ended this week, Dubai is betting pent-up demand will see the industry quickly bounce back, billing itself as a safe destination with the resources to ward off coronavirus.

The emirate, which had more than 16.7 million visitors last year, opened its doors to tourists despite global travel restrictions and the onset of the scorching Gulf summer in the hopes the sector will reboot before high season begins in the last quarter of 2020.

Embarking from Emirates flights, where cabin crew work in gowns and face shields, the first visitors arrived on Tuesday to be greeted by temperature checks and nasal swabs, in a city better known for skyscrapers, luxury resorts and over-the-top attractions.

Tourism chief Helal Al-Marri said that people may still be reluctant to travel right now, but that data shows they are already looking at destinations and preparing to come out of their shells.

“When you look at the indicators, and who is trying to buy travel, 10 weeks ago, six weeks ago and today look extremely different,” he said in an interview.

“People were worried (but) people today are really searching heavily for their next holiday and that is a very positive sign and I see a very strong comeback.”

The crisis crushed Dubai’s goal to push arrivals to 20 million this year and forced flag carrier Emirates, the largest airline in the Middle East, to cut its sprawling network and lay off an undisclosed number of staff.

But Al-Marri, director-general of Dubai’s Department of Tourism and Commerce Marketing, said that unlike the gloom after the 2008 global financial crisis, the downturn is a one-off “shock event.”

“Once we do get to the other side, as we start to talk about next year and later on, we see very much a quick uptick. Because once things normalize, people will go back to travel again,” he said.

The reopening comes as the UAE battles stubbornly high coronavirus infection rates that have climbed to more than 53,500 with 328 deaths.

And as swathes of the world emerge from lockdown, for many travelers their holiday wish lists have shifted from free breakfasts and room upgrades to more pressing issues like hotel sanitation and hospital capacity.

With its advanced medical facilities and infrastructure, Dubai is betting it will be an attractive option for tourists.

“The first thing I’m thinking is — how is the health-care system, do they have it under control? Do I trust the government there?” Al-Marri said. “Yes they expect the airline to have precautionary measures, they expect it at the airport. But are they going to a city where everything from the taxi, to the restaurant, to the mall, to the beach has these measures in place?”

Tourists arriving in Dubai are required to present a negative test result taken within four days of the flight. If not, they can take the test on arrival, but must self-isolate until they receive the all-clear.

While social distancing and face masks are widely enforced, many restaurants and attractions have reopened with business as usual, even if wait staff wear protective gear and menus have been replaced with QR codes.

“When it comes to Dubai, I think it’s really great to see the fun returning to the city. As you’ve seen, everything’s opened up,” Al-Marri said.