Oil investors see US$7.4B vanish as dividends targeted

ENERGY

The cheque is not in the mail. Bludgeoned by falling energy prices, at least a dozen oil and natural gas companies have opted to cut dividends this year to preserve cash, cannibalizing payouts considered sacrosanct by many investors.

The cost to shareholders: more than US$ 7.4 billion in lost income, compared to what they would have re- ceived this year if the payouts remained the same.

It’s another painful measure — along with tens of thousands of layoffs and more than US$100 billion in cancelled investments — of the toll taken on the industry by the worst oil and gas price slump in decades. The quarterly payments, prized by conservative shareholders as a source of steady income, are unlikely to be restored any time soon.

“It really reinforces the necessity of having a margin of safety if you are buying a stock primarily for its dividend,” said Josh Peters of Morningstar’s Dividend-Investor newsletter. “What we have found for some of the energy companies is that the margin of safety was either slim or nonexistent.”

Kinder Morgan Inc.’ s 75- per- cent dividend cut was the biggest, amounting to a US$ 3.44- billion loss for shareholders over the course of 2016. The announcement from North America’s largest pipeline operator “came as a shock to some people and obviously was deplored by some people,” executive chairman Richard Kinder told analysts Jan. 27.

The move was necessary to help the Houstonbased company keep i ts i nvestment- grade credit rating while ensuring it has enough money to pay debts and grow, Kinder said. Since the Dec. 8 announcement, shares have risen about 20 per cent, compared with a 5.3- per- cent gain for the Alerian MLP stock index, which tracks energy infrastructure companies.

In Canada, Husky Energy Inc., Crescent Point Energy Corp. and Cenovus Energy Inc. also cut dividends. Husky eliminated its longstanding cash dividend last year, cancelling what would have been US$ 1.2 billion in payments for 2016.

“The board will continue to review the dividend on a quarterly basis with the objective of restoring a sustainable dividend,” Kim Guttormson, a spokeswoman for Husky, said in an email.

Also paring dividends this year: U. S. drillers Cimarex Energy Co., Devon Energy Corp., Noble Energy Inc. and Range Resources Corp. and U. K. oil- services provider Amec Foster Wheeler PLC.

Bloomberg News calculated the cost to shareholders based on the number of periods companies will pay at the lower dividend rate in 2016, assuming no further changes.

For smaller or newer drillers like a Cimarex or Range Resources, which e ach halved their dividend, the decision was probably easier, said Brian Youngberg, an Edward Jones & Co. analyst in St. Louis. For more wellestablished companies, like ConocoPhillips, it’s a more painful choice, he said.

“They are income stocks, and these guys know why t heir i nvestors own t he shares.”