Dividends pressured as Big Oil faces worst-ever losses
the first time since the West’s five energy supermajors were created in the early 2000s, all of them are set to post a quarterly loss.
Once a money-making machine, Big Oil is now relying on everincreasing amounts of debt, raising the pressure on highly-prized dividends. BP may cut its payout for the first time since the Deepwater Horizon disaster a decade ago.
The sheer scale of global oil demand destruction — some 30 million barrels a day, or a third of regular usage, in April — sent energy markets into a secondquarter tailspin, from which they’ve only recently started to recover. Worst-in-a-generation oil prices combined with OPEC production cuts, collapsing refining margins and millions of barrels of unsold crude mean no facet of Big Oil’s business has emerged unnor scathed.
“There really hasn’t been anywhere to hide, even in the integrated model,” said Noah Barrett, a Denver-based energy analyst at Janus Henderson,which manages $294 billion. “Terrible quarter, but it’s behind us now. The focus will be on how the recovery takes shape.”
Dividends
For BP, analysts from banks including Goldman Sachs Group Inc. and Citigroup Inc. are expecting a cut in the payout of anywhere between 30 percent and 65 percent, a historic move for a company that has been a cornerstone dividend payer in the U.K.’s FTSE 100 Index for decades. It would reduce the amount of debt needed and free up cash for Chief Executive Officer Bernard Looney’s high-profile strategy to eliminate almost all of the carbon emissions from the company’s operations and the fuel it sells to customers.
The move would follow EquiFor and Royal Dutch Shell, which cut its dividend for the first time since World War II earlier this year. Exxon Mobil, Chevron and Total aren’t expected to follow suit.
Debt
Big Oil borrowed some $80 billion during the quarter, giving it a whopping cash balance of $194 billion to see it through an intense period of losses as well as scheduled debt repayments this year and in 2021, according to Jefferies Financial Group Inc. But this will increase net-debt-to-capital ratios, a key measure of indebtedness.
European majors will remain more indebted than their U.S. rivals, but dividend cuts may bring some relief. Despite having low debt coming into the crisis, Exxon’s borrowing is rising rapidly and over time will become a cause for concern, according to Morgan Stanley and Goldman.
Exxon’s net debt climbed by $8.8 billion in the the quarter and will surge to $78 billion by the end of 2022, Goldman said. Chevron’s agreement to acquire Noble Energy Inc. includes the assumption of about $8 billion of additional borrowings. That still leaves the company well-placed to pay its dividend, CEO Mike Wirth said.
Refining
Refining is seen as the “hedge” part of the Big Oil integrated model. When crude prices are down, refining is often unaffected because of lower feedstock costs, but that’s an “oversimplification,” according to Paul Cheng, a New York-based analyst at Scotiabank. When no one’s buying petroleum because of lockdowns to fight the global pandemic, all parts of the oil business suffer.