XOM Exxon Mobil Corp

   (FROM THE WALL STREET JOURNAL 11/16/15) 
   By Sarah Kent 

The world's biggest energy companies have doubled down on their promise to protect dividends, despite a precipitous drop in profits this year, driven by a steep decline in oil prices.

In the first nine months of the year, the four oil companies known as the supermajors -- Royal Dutch Shell PLC, Exxon Mobil Corp., Chevron Corp. and BP PLC -- have seen their collective earnings fall by more than 70% from a year earlier. Over the same period, they have handed out nearly $28 billion to their shareholders, a roughly 10% increase from the 2014 period.

"The dividends and payouts to shareholders have no reason to be as volatile as the oil price," said Patrick Pouyanne, chief executive of France's Total SA, the world's fourth-largest oil company by production, at a conference in Abu Dhabi this week.

He added that it would be a "terrible mistake" to remove dividends and a sign that "we aren't good at our business."

Oil prices are currently trading slightly above $40 a barrel -- their lowest levels since August -- and more investment banks, energy companies and analysts don't see the price rising above $60 a barrel until 2017. The International Energy Agency said Tuesday oil prices would slowly rise to $80 a barrel by 2020, but also outlined a scenario in which they stayed at $50 a barrel.

This has raised questions on a potential cash crunch at oil companies, a problem the firms acknowledge and say they are taking steps to address. The companies say they retain robust balance sheets that give them flexibility to raise more funds to help cover costs when needed.

Oil majors have little choice but to pay fat dividends to keep investors. Most of these companies don't offer investors compelling growth prospects as they struggle to replace even the millions of barrels of oil pumped every year. Fat dividends are a crowd-pleasing but potentially risky strategy given concerns about the length of the current price downturn and its impact on cash flow.

"Dividends are extremely important. Certainly a lot of the holders of companies like Royal Dutch and BP are expecting these dividends to be paid," said Richard Marwood, fund manager at AXA Investment Partners, which holds energy stocks. Any reduction in dividend would "probably see quite a shocked reaction in the share price," Mr. Marwood said.

This strategy also may not be sustainable if oil prices, which are in the midst of their worst slump since the 1980s, continue to slide. The dividend yields -- the value of shareholder payouts as a percentage of the share price -- oil companies made last quarter are at the highest level in more than a decade, according to data from FactSet.

An investor who owns 1,000 shares of Shell would have made $1,410 in dividend so far this year, which is a yield of nearly 6% per share based on Friday's closing stock price.

Investors have come to rely on these firms making such regular payouts. Chevron has increased its annual per-share dividend for each of the last 28 years. Exxon has increased its dividend by an average of 6.4% every year for the last 33 years, and is the only major to maintain a share-buyback program. Shell and BP have reiterated that maintaining returns to shareholders is a priority.

These payments to investors come amid $22 billion in slashed spending on exploration and development of oil fields, and 80 scrapped or delayed projects so far this year, according to Lamar McKay, BP's head of exploration and production. More cuts are expected next year if prices don't pick up significantly.

"In essence the dividend yield isn't something that drives value. . .we do think management of these companies should try to spend time trying to create value for the business rather than trying to attract shareholders with promises of stable and growing dividends," said Martijn Olthoff, a senior portfolio manager at Dutch pension-fund manager APG Asset Management NV, which owns shares in these oil majors.

Some companies also have offered shareholders the option to receive payment in shares instead of cash, and have divestment programs that can bolster cash flow.

Exxon said last month that it has generated $7.4 billion in free cash flow this year. Shell said it has covered its capital spending and shareholder payouts over the past year from cash and asset divestments.

BP laid out plans to cover its spending with cash by 2017 even at $60 a barrel and Chevron has also promised it will meet dividend payments from cash flow in 2017.

Oil companies also have put a laser focus on value. BP has said that 80% of the new projects it is considering break even below $60 a barrel and that number is expected to move lower in line with cost deflation.

Shell is looking at new projects that can make money at around $55 a barrel. The company has only approved two major new projects this year and has scrapped big-ticket projects in Alaska and Canada.

"This is all about making sure we can continue paying dividends to our shareholders," said CEO Ben van Beurden.

Edinburgh-based consultancy Wood Mackenzie said this month that longer-term growth prospects are already starting to suffer from lower investment. Last month, Chevron lowered its production target for 2017 by 100,000 to 200,000 barrels a day, following a similar move by French oil major Total SA in September.

Among big oil companies, only Italian giant Eni SpA has taken the step of actually cutting its dividend, slashing the amount of cash it returns to investors by nearly 30% in 2015 compared with last year.

Eni Chief Executive Claudio Descalzi has said oil companies must live within their means, but it is a move his competitors haven't followed.

After Chevron reported its profits fell 60% in the third quarter from a year earlier, the company's Chief Executive John Watson, said: "Our first priority is to maintain the dividend and grow it as the pattern of earnings and cash flow permit."

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(END) Dow Jones Newswires

November 16, 2015 02:47 ET (07:47 GMT)

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