Oil Dividends Are Under Scrutiny as Small Companies Crack

  • Biggest energy companies' dividend commitment comes at a price
  • Some investors critical, say investment should come first

Europe’s biggest energy companies are doing everything they can to keep paying dividends. If their smaller peers are anything to go by, they’re fighting a losing battle.

Companies such as Royal Dutch Shell Plc, Total SA and BP Plc have reduced spending, sold assets and even issued scrip dividends in lieu of cash to keep shareholders happy in the midst of the worst oil rout in over a decade. While the larger operators have largely succeeded in keeping payouts intact, smaller players are starting to show the strain.

Amec Foster Wheeler Plc and Prosafe SE were the latest of at least five energy companies to reduce or cut their dividends in the past month, spurring declines of at least 14 percent in their shares. Some investors worry bigger operators will be unable to avoid that fate unless oil prices recover.

“Probably not every company will succeed,” said Dirk Thiels, head of investment management at KBC Asset Management in Brussels. “It has to be proven that they can keep their dividends so that’s still a concern to us.”

Amec slumped by the most on record on Thursday after the oil-and-gas engineering company said it would halve its dividend as low oil prices erode earnings. The same day, Norwegian rig provider Prosafe suspended its payouts. Marathon Oil Corp. recently reduced its payout by 76 percent, while Noble Corp., an oil-drilling services provider, said it will cut as it seeks to free up cash. Husky Energy Inc.’s shares fell to the lowest in a decade Oct. 30, after the Canadian oil producer said it would start paying its dividend in stock.

Energy producers in the Stoxx Europe 600 Index were little changed at 1:12 p.m. in London.

The biggest seven integrated oil companies in the Stoxx 600 have reduced their total dividend payments by 12 percent this year to $33.4 billion, even as oil tumbled 18 percent, and are forecast to keep payouts unchanged in 2016, data compiled by Bloomberg show. Although they are now also conserving cash by giving shareholders the option of taking payment in stock, Shell and BP are still among the most generous to investors, paying out $12 billion and $7.3 billion, respectively.

Dividends Hold Amid Oil Fluctuations
Dividends Hold Amid Oil Fluctuations

Generosity comes at a price. Energy companies including Total and BP have announced cutbacks of $180 billion this year, the most since the oil crash of 1986, according to Oslo-based energy consultant Rystad Energy AS. BP lowered its 2015 capital-spending forecast to about $19 billion from $23 billion in 2014, and plans to sell $10 billion of assets by year-end, all the while keeping dividends unchanged. Repsol SA, Spain’s largest oil company, plans to sell 6.2 billion euros ($6.7 billion) of assets and cut investments.

“It’s ridiculous to protect dividends when oil is under siege and the bottom is not in sight,” said David Tawil, a co-founder of New York-based Maglan Capital LP. “In a time of industry flux, as an equity holder, I’d prefer to see my company preserving capital and finding great bargains in the forced sale of assets by distressed peers. That is likely to be a much better return-on-capital expenditure than an equity dividend.”

Efforts to keep the dividends haven’t prevented shares from underperforming. Stoxx 600 energy producers have gained only 1.2 percent this year, trailing the 9.7 percent gain for the broader gauge.

While the cost-cutting and investment cutbacks help to mitigate balance sheet pressure and support cash flow, it comes at a cost to production growth. “Selling assets and cutting capex works and it’s a good band-aid solution to the cash-flow crunch, but it’s not sustainable in the long-term,” according to William Hares, a London-based analyst with Bloomberg Intelligence. “It’s sacrificing mid-term growth and reserve replacement to protect near-term dividends.”

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