If CAPEX Plummets, Will Dividends Take a Nosedive?
Oil C-suites across the industry have warned of additional cuts to capital spending (CAPEX), but a new report from Oppenheimer is suggesting investors’ dividends may also end up on the chopping block.
“Projected operating cash flow barely matches the preliminary CAPEX guidance for the majors, and when dividends are included, we estimate an average deficit of [about] 50 percent of operating cash flow this year,” the analysts (OPCO) said. “E&Ps [exploration and production] companies’ CAPEX is currently more than double their operating cash flow, and including the dividend, E&Ps could face deficits of [about] 260 percent of OCF [operating cash flow].”
Cost reductions, more efficiency and improved well performance will provide an assist, but not enough to offset record-low oil prices, OPCO said.
Current, attractive dividend yields of 6.6 percent for the majors and 2.7 percent for large E&P companies, and wider deficits are raising investors’ concerns about the sustainability of those payouts, OPCO said.
As the analysts explained, record dividend yields result from falling stock prices, not growth in the dividends. Among the majors, dividends account for an average 43 percent of cash flow. At Exxon Mobil Corp., dividend yield amounts to 48 percent of cash flow; at BP plc, it’s 35 percent. Among the large E&Ps, dividends account for 68 percent of cash flow at Occidental Petroleum Corp.; 66 percent at Devon Energy Corp. and 59 percent at ConocoPhillips.
“We believe dividends could be at risk unless oil prices double,” OPCO said. “The higher the yield, the greater the risk of a dividend cut.”
And analysts are increasing concerned that investors are unprepared for how CAPEX cuts will impact their bottom line, whether through dividend cuts or plummeting stock prices.
Analysts at Raymond James said in a Jan. 19 note that if $35 oil follows the current decline curve, it would push oilfield spending into a massive collapse for the second consecutive year.
“We are convinced investors still do not fully appreciate how far 2016 E&P spending will collapse if oil prices stay anywhere near where they are today,” the analysts (RayJa) said.
When trading ended Wednesday, U.S. crude (WTI) was trading at $28.46 per barrel. Brent settled at $28.76 per barrel.
Even a $5 change in WTI translates into a loss of about 20 percent in U.S. E&P cash flows, RayJa said.
Based on current prices, 2016 will face a steeper decline than 2015; using RayJa’s model, U.S. E&P spending will decline between 65 percent and 70 percent.
RayJa’s bottom line is dramatic.
“A 70 percent decline in U.S. oilfield spending is far worse than most investors are expecting, and the resulting U.S. rig could would be 50 percent below the lowest ever recorded,” they said.
However, even as the first half of 2016 does indeed appear bleak, RayJa noted that oil price sensitivity works both ways.
“If oil prices recover like we expect in 2017, E&P cash flow and spending would also rebound much faster than most think,” the analysts said.
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