Over the past year or so as crude oil has been more than cut in half, the companies within the space have had to take some fairly dramatic actions (both from an operational and financial management level) in the form of cost cuts, capex cuts, production cuts, buyback dividend cuts. Smaller more levered company’s lower down the food chain like Chesapeake (CHK) have discontinued buybacks and dividends, while Transocean (RIG) has dramatically reduced their quarterly dividend from 75 cents a share to 15 cents, and likely down to zero soon, and maybe the stock going to zero not far behind. And it’s not just the smaller levered companies that are showing signs of financial stress, with the stocks of large integrated oil company’s like Chevron (CVX) and Exxon (XOM) down 30% and 20% respectively on the year, with CVX already having nixed their share buybacks in 2015, and XOM cutting theirs to half of that they had previously planned.
Last night on CNBC’s Fast Money we had a quick discussion on the potential for dividend cuts by the large integrates, and what the options market is predicting, watch here:
Options prices are predicting a potential (key word is potential) cut to CVX’s div by almost 20% by the end of 2015 and 10% for XOM. There are lots of inputs to these calculations, a wide bid ask and some other fairly wonky factors. But you can take it to the bank that the companies will NOT raise their dividends (current dividend yield for CVX is 5.4% and XOM is 3.92%) despite the fact that the yield seems to tick up daily as the stocks decline. And if either, (particularly XOM) were to actually cut their dividend it would likely be a major market moving event.
The point of this post is not to predict doom and gloom at a time where it seems sentiment could not be worse in the oil patch (as crude holds on for dear life at 6 year lows) but to highlight the potential for the next shoe to drop. I am not a financial analyst, and I don’t know a ton about the operations of large integrated oil companies, but as dividend cuts and potential bankruptcies in the space among smaller companies increase in the coming months/quarters that investors will start to handicap the potential for dividend cuts from the likes of CVX and XOM. (much like in the financial crisis as it related to bellweather banks.)
Why is this so important, well cash return has been one of the main reasons to own XOM for 15 years, per the WSJ:
Exxon alone has paid out a whopping $342 billion to shareholders since merging with Mobil in 1999. But much of that has been in the form of buybacks that reduced its shares outstanding by 40%.
To put this in context, the company’s current market cap is $310 billion!!
Just putting it on your radar.