Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Sorting companies that measure their cash flow in the many billions of dollars into haves and have-nots almost seems grotesque. But the market is funny like that.

Take a look at this chart of annualized dividend yields for several of the biggest oil companies over the past year.

Major Differences
Dividend yields have diverged sharply between the oil majors
Source: Bloomberg

Two things stand out. First, they've all taken a hit, with dividend yields rising by between roughly 1 (Exxon) and 4 (ConocoPhillips) percentage points since last February as low oil prices have pulled the rug from under cash flows.

The second point is that they have separated into two groups based on what has happened since August's panic, when Brent crude plunged back below $50 a barrel and even Exxon saw its dividend yield spike above 4 percent for the first time since the merger that formed the modern company. These days, of course, $50 a barrel sounds like paradise in the oil market. Yet both Chevron and Exxon sport lower yields than back then, while Conoco, BP and Royal Dutch Shell have seen theirs widen out even further.

BP just reported its worst annual profit in at least several decades, and its current dividend yield of more than 9 percent isn't far off the average for the master limited partnerships sector, which is stricken with fears of distribution cuts.

Meanwhile, Conoco's pure upstream exposure without the hedging benefit of refining and marketing leaves its cash flows highly sensitive to movements in oil; its stock has the tightest correlation with Brent prices over the past year. Shell looks more robust in terms of scale, integration and financial leverage, but its mistimed acquisition of BG Group weighs heavily on the stock.

Chevron and Exxon are faring better partly because of relatively low leverage and lingering faith on the part of investors that these two can ride out the downturn for a while yet.

The Debt Set
Net debt as a percentage of net debt plus equity has been rising as cash flow fails to cover capital expenditure and shareholder distributions
Source: Company reports, Bloomber
Note: Conoco's ratio for 2015 is implied by consensus forecasts. The company reports full-year results on February 4.

Even so, sharp cutbacks in investment budgets and, in Exxon's case, share buybacks indicate that even these two big U.S. majors could see dividend yields rise further this year, as their share prices weaken, if oil prices don't recover soon. Exxon may even lose its coveted triple-A credit rating.

A longer perspective is useful here. The chart below shows yields over the past decade.

Remembrance of Crises Past
BP aside, the majors' dividend yields today are even higher than during the financial crisis
Source: Bloomberg
Note: BP's zero yield in 2010 and early 2011 reflects suspension of dividend due to the Macondo disaster.

Fears about the sustainability of dividends from the majors -- their most prominent calling card with investors -- are even worse now than during the panic of 2008 and 2009. It is one more sign, along with a gargantuan oil glut and talk of coordinated supply cuts (likely vain), that the current oil slump is far worse.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net