Oil Industry's Plan to Keep Investors Happy: Borrow More Money

(Bloomberg) -- The world’s largest oil companies have a plan to weather the worst market in over a decade: borrow more money.

Major oil companies faced with the lowest crude prices since 2003, capital spending budgets with little left to cut and strong commitments to their dividends will have to take on billions in debt this year as they await a market rebound.

Take BP Plc, whose net debt rose by almost $5 billion in 2015. After reporting a record annual loss on Tuesday, Chief Executive Officer Bob Dudley said he would borrow billions more if it was needed to sustain investor dividends. “We know how important the dividend is to our shareholders,” he told analysts in London. “We’re not going to drop the company off a cliff. But I think the balance sheet is strong right now.”

BP on Tuesday said it would cut 3,000 more jobs by 2017, while Exxon Mobil Corp. reported its lowest drilling budget in 10 years. Still, the two companies continue to spend more than they earn. Royal Dutch Shell Plc, Europe’s largest producer, had its credit rating cut Monday to the lowest-ever by Standard & Poor’s, and downgrades of several other companies will probably follow as debt levels rise.

“They’re all hoping if we can ride this out for another 12 months, then the tide will hopefully turn and lift the pressure.” said Philip Lawlor, a strategist at Smith & Williamson Investment Management LLP in London, which owns BP shares. If that doesn’t happen “then they have to ask the uncomfortable question: Can we really afford the dividend?”

Factored In

While investors don’t see a dividend cut as inevitable, a 10 percent drop in BP shares following fourth-quarter earnings shows they think it’s possible, according to Lawlor. BP’s 1-year forward dividend yield, which reflects current share prices and expected future payouts, rose above 9 percent in January. Shell, which hasn’t cut dividends since the Second World War, also saw its yield surge to the highest in two decades.

“The companies are walking up a down escalator, oil prices are dropping so fast,” said Iain Armstrong, an analyst with Brewin Dolphin Ltd. in London, which owns shares in BP and Shell. “Though they seem unconcerned about a potential credit rating cut, that’s additional pressure on the companies at these difficult times.”


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