Energy Companies Find it Harder to Cover Their Rich Dividends as Oil Prices Fall -- Barrons.com
By Andrew Bary
With the ongoing drop in crude-oil prices, dividend coverage at many big energy companies is getting tight.
That's a worrisome development for investors, even though the big oils have considerable financial strength and are likely to maintain their payouts absent a collapse in energy prices.
Energy stocks were down again Wednesday, with the Energy Select Sector SPDR exchange-traded fund (ticker: XLE) off $1.49 to $47.87, its lowest level in 11 years. The ETF is down 20% this year.
Brent crude continued its recent slide Wednesday, falling $1.62 a barrel to $53.33 and is down almost 20% this year. Brent is a key international benchmark. West Texas Intermediate, the main U.S. crude, was down $1.28 to $48.62 a barrel. Brent generally trades at a premium to WTI.
Chevron (CVX) and ConocoPhillips (COP) are close to covering their dividends from projected 2020 earnings at current oil prices, based on a report published a month ago by J.P. Morgan analyst Phil Gresh. Chevron needs a Brent price of $57 a barrel and ConocoPhillips, $55 a barrel. Exxon Mobil (XOM) needs a much higher oil price of $87 a barrel to cover its 2020 dividend from earnings, Gresh estimates.
The big drop in the prices of U.S. natural-gas and liquefied natural gas, an international commodity, doesn't help dividend coverages. U.S. natural-gas prices are trading below $2 per million BTUs at $1.82, down almost 40% in the past year, hurt by the unusually warm winter.
The two largest European energy companies, BP (BP) and Royal Dutch Shell (RDS.B), cover their dividend at lower oil prices than their U.S. peers. Oswald Clint, who covers the European oil stocks at Bernstein, calculates that BP covers its dividend at about $40-a-barrel Brent and Royal Dutch at $51 a barrel.
The eroding dividend coverage is weighing on energy stocks, although the strong balance sheets of the major companies should enable them to cover dividends for a sustained period. Exxon, for instance, relied on asset sales and debt issuance to cover its dividend last year.
Exxon's inadequate dividend coverage from earnings, however, has weighed on its stock in the past year. Its shares are down 32% over the past year, against an 18% decline for Chevron. Exxon, virtually alone among its peers, is ramping up capital spending in a bid to boost its energy production in the coming years.
Investors, though, like the comfort of dividend coverage with earnings and tend to penalize companies when coverage gets tight. Chevron fell $2.67 to $98.04 Wednesday, and yields 5.2%. Exxon was off $1.19 to $53.01, a new 15-year low, and yields 6.4%. ConocoPhillips dropped $2.66 to $51.17, and yields 3.3%.
BP was off 25 cents to $32.68, and yields 7.6%. It recently boosted the dividend on its U.S. shares to 63 cents a quarter from 61 cents. Royal Dutch's B shares, which track the underlying U.K. stock, gained 12 cents to $46.32, and yields 8.1%.
Occidental Petroleum (OXY) has been hard hit along with other big exploration-and-production stocks. Its shares fell $1.97, or 5%, to $34.22 Wednesday, a new 52-week low. Its dividend yield is now 9.2%. Occidental needs a Brent price of $61 a barrel to cover its dividend from projected 2020 earnings, Gresh's analysis shows.
Occidental management has expressed support for maintaining the dividend, and the company declared a regular quarterly payout of 79 cents a share earlier this month. It likely will have more to say about the dividend when it reports fourth-quarter earnings on Feb. 27 and holds a conference call on the following day.
Occidental took on significant debt to fund its $57 billion deal last year to buy Anadarko Petroleum, and it issued $10 billion of costly 8% preferred stock to Berkshire Hathaway (BRK.A). Occidental stock is down about 50% since its interest in Anadarko first surfaced last April.
Among major Canadian oils, Suncor Energy (SU) covers its dividend at a Brent price of $54 a barrel, and Canadian Natural Resources (CNQ) needs a price of only $46 to cover its payout this year, Gresh estimates.