Pay Dividends Or Keep Ratings
05 Février 2016 - 9:03AM
Dow Jones News
(FROM THE WALL STREET JOURNAL 2/5/16)
By Sarah Kent and Bradley Olson
The world's biggest energy companies have a tough decision to
make amid languishing oil prices: Do they keep their coveted
investment-grade credit ratings or maintain century-old practices
of paying shareholders annual dividends worth billions in cash?
Exxon Mobil Corp. and its peers are grappling with the collision
course between the two, which appears unavoidable as crude
continues to hover around $30 a barrel. Even with announced
spending cuts that exceed $92 billion, producers are losing money
on almost every barrel they take out of the ground. Paying
dividends makes their cash shortfall even worse.
Four of the biggest Western oil companies -- Exxon, Royal Dutch
Shell PLC, Chevron Corp. and BP PLC -- are poised to pay more than
$35 billion in dividends to investors this year, an amount equal to
about 40% of their combined cash flows, says Oppenheimer & Co.
To do so, they face increased pressure to borrow, a strategy that
has alarmed ratings firms.
"The question is, how bad are things going to get in 2016?" said
Simon Redmond, director of oil and gas corporate ratings at
Standard & Poor's Ratings Services. "For a company to focus on
continued cash distribution is not credit positive."
Since the start of the year, all three of the world's top
ratings firms have warned that oil company credit standings are at
risk. S&P has already downgraded Shell and Chevron to mid-tier
investment grade ratings, and raised the prospect that Exxon --
whose AAA rating outlasted even the U.S. Treasury's -- could face a
one-step downgrade from its top-tier status.
So far, the chief executives at the biggest publicly traded
energy companies have chosen dividends over higher debt ratings.
But many smaller rivals, including ConocoPhillips, have slashed
their hefty payouts. Conoco last year told investors its dividend
was sacrosanct, but on Thursday cut its first quarter payment by
66% to 25 cents a share as it reported a $3.5 billion loss for its
fourth quarter. Conoco shares fell nearly 9% to $35.32 in 4 p.m.
New York trading.
Shell, which posted a $1.8 billion fourth-quarter profit, off
60% from a year earlier, reiterated plans to keep paying its
dividend this year, helping boost its shares.
Nowhere is the tension more pronounced at the largest oil
companies than at Exxon, which has increased its dividend for 33
straight years and made the payouts for more than a century. The
company's bond rating has endured for decades through a number of
commodities price crashes, the Valdez oil spill in Alaska's Prince
William Sound and even megamergers with Mobil and XTO Energy.
Exxon is better managed than most countries, said Joe D'Angelo,
an energy consultant at investment bank Carl Marks Advisory Group
LLC. "For them to have lived through so many hurdles and now this
one trips them, you have to stop and think about it," he said.
A ratings downgrade isn't the worst thing for most integrated
oil companies because they are unlikely to lose access to capital
markets or see their financing costs soar. This week Bob Dudley,
BP's chief executive, said a ratings cut wouldn't have a
significant impact on his company.
But ratings cuts would represent a loss of prestige, a sign that
the ability of these companies to dominate world markets has
diminished with this latest downturn.
"We get value from the AAA credit rating in our business,
whether it be access to financial markets or access to resources,"
Jeff Woodbury, an Exxon vice president, said this week. "There is a
benefit that we get from it, and we see it as being important."
Many oil and gas executives paying high dividends this year have
pledged repeatedly not to cut the payouts in virtually any
circumstance. One early outlier: Italy's Eni SpA cut the dividend
in March and its shares fell 7% on the news. Since then Eni's stock
has declined less than Chevron, BP and Shell.
Dividends put a strain on big oil companies because they are
trying to spend only as much cash as they take in from their
operations. Even if they manage to achieve that, they have to come
up with more for dividends. "It's a terrible market to be trying to
sell most assets out there," John Watson, Chevron's CEO, said last
week. But he added that maintaining and even growing the dividend
remains Chevron's "number one financial priority."
Such promises are essential to luring investors in the face of
the worst oil crash in decades. For millions of retirees, who buy
stock directly or through investment funds, dividends are a key
source of income. Some could see a cut as a betrayal, analysts
said.
"To a lot of generalist investors, there's a view that an
investment in Exxon or Chevron is safe," said Norman MacDonald, a
portfolio manager at fund manager Invesco Ltd. The companies are
"painted into a corner," he said. Directors should reconsider their
dividend policies, said Fadel Gheit, an analyst at Oppenheimer
& Co. who has called for oil firms to reduce the payouts.
(END) Dow Jones Newswires
February 05, 2016 02:48 ET (07:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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