Five Hours and $20 Billion in Cuts: Big Oil Goes Long
Comment of the Day

January 29 2015

Commentary by David Fuller

Five Hours and $20 Billion in Cuts: Big Oil Goes Long

The first major oil companies to report earnings amid the worst oil crash since 2009 all pledged to protect shareholder payouts even as they announced more than $20 billion in spending cuts in a span of five hours.

By preserving and even increasing dividends, energy companies are attempting to keep investors on board while they wait for oil and natural gas prices to rebound to more profitable levels. Producers, meanwhile, are choosing to cut drilling programs and workforces to weather a downturn that could extend for years.

Royal Dutch Shell Plc, Occidental Petroleum Corp. and ConocoPhillips pledged to slash spending by almost $10 billion this year alone -- enough to drill more than 1,400 shale wells. The risk: cannibalizing budgets to feed cash to shareholders may leave companies with reserves too anemic to fuel future output, said Timothy Doubek, who helps manage $26 billion in corporate debt at Columbia Management Advisors.

“It’s a pretty impressive ax they’re taking to their drilling budgets, but when the stock is down 30 or 50 percent, what are they trying to protect by preserving dividends?” Doubek said in a telephone interview from Minneapolis. “You’re protecting a stock price that can’t be protected. Why don’t you keep as much cash as possible so you can be the first one to take advantage when assets go up for sale?”

Shell, Occidental and ConocoPhillips handed over more than $17 billion in dividends to shareholders last year, according to data compiled by Bloomberg. For the full year, Shell and ConocoPhillips paid out $11.8 billion and $3.5 billion, respectively. Occidental’s dividend bill for the first nine months of 2014 was $1.69 billion; the company hasn’t yet disclosed its fourth-quarter payout.

David Fuller's view

The big international oil companies have long-term institutional investors who prize the shares mainly for their attractive dividends.  For that reason alone, the decision to hold payouts while slashing some now marginal projects makes sense to me.  It will be a different story if Brent crude oil is still trading below $50 a barrel a year from now.  Note: a slight loss of downside momentum is evident but there have been no upward dynamics to date.

Corporate governance is never more important than in choppy, uncertain times.  Fortunately, Royal Dutch Shell B, which a number of subscribers and I hold, was in a far healthier position prior to last year’s slump in oil prices, thanks to the capital discipline of comparatively new CEO Ben van Beurden.  This was certainly not the case as 2008 commenced.  

Fortunately, RDSB also produces more natural gas than oil and has a very exciting new project scheduled off Australia’s coast.  This involves Prelude, the world’s biggest ever floating vessel and first ocean-based LNG plant, scheduled to commence production in 2017.

I last increased my stake in RDSB on 10th December 2014.  I am hopeful rather than confident about its medium-term recovery potential.  More importantly, investors in Shell are being paid for their patience with a dividend near 5.5 percent.  Here are the latest Broker Recommendations for Royal Dutch Shell B.

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