(NYSE:CVX) and (NYSE:XOM): Chevron, Exxon dividends could still grow amid low oil prices, Morningstar analysts say
Oil companies appear to be in the cross hairs of divestment movements given increasing concerns about global greenhouse gas emissions.
But over the shorter term, as oil prices have slipped from above $100 last year to the around $40 this year, investors have been fretting about Big Oil dividends, which have historically been a key reason for investors to buy shares of the world’s biggest producers.
According to Morningstar analysts, dividends should generally be safe but probably won’t grow much, but there could be bright spots.
U.S. integrated oil companies Chevron (NYSE:CVX) and Exxon (NYSE:XOM) are better situated to weather the pronounced slump in oil prices than those of their European competitors, the analysts said in an October note.
High-yield European integrated oil companies will largely maintain their payouts without growing them while Chevron and Exxon will probably grow their dividends at lower levels, the analysts say. But the American firms will probably not continue their robust share repurchase programs that historically have brought their yields in line with their European competitors, the note says.
Chevron was one of two energy companies listed as disclosure leaders in CDP’s Climate Disclosure Leadership Index. It scored a 99 B for 2015 while Exxon scored an 88 C. Formerly the Carbon Disclosure Project, CDP ranks companies based on disclosure of their environmental data.
Advantages for Exxon and Chevron include exposure to long-life projects like LNG, oil sands and large gas processing assets that are advantageous for managing through a sustained period of lower oil prices, the note says.
Exposure to shorter cycle assets such as unconventional shale gas and tight oil projects also skew in favor of Exxon, Chevron and ConocoPhillips (NYSE: COP), the note says. Their greater exposure in the Permian Basin allows them assets with low breakeven prices that facilitate production growth even with lower oil prices.
“We’d rate Chevron as the best positioned in the Permian given that its acreage is concentrated in the Midland and Delaware basins where economics have proven superior so far,” the analysts said.
“In contrast, the European-based firms hold little legacy acreage, and recent efforts to increase exposure through acquisitions and joint-ventures have largely proven disappointing,” the note said.
The probability that oil prices remain “lower for longer” combined with high dividend yields shows market doubt, “signaling a warning or an opportunity depending on your point of view,” the Morningstar analysts wrote.
Over the longer term, the analysts think the concerns are “overblown” because the companies will cut back on investment in order to keep paying their dividends. Some have also begun offering scrip payouts to further save on cash, but asset sales will also be required, accordion to the Morningstar report.
By 2018, average spending will be around 85 percent of 2015 levels for Chevron, Exxon, ConocoPhillips, Total (NYSE: TOT), BP (NYSE:BP), Statoil (NYSE:STO), Eni (NYSE:E) and Royal Dutch Shell (NYSE:RDS.A), the analysts wrote.
The improved cash flows that come with reductions in capital spending will come through industry cost deflation as well as project deferment, the analysts says.
Reducing spending takes more time for the large integrated companies than for smaller exploration and production companies because the bigger firms usually are invested in longer time frame projects where outlays are set once construction begins, according to Morningstar.
The lower spending will help to lower breakeven levels, which are currently around $78 per barrel, the analysts said. Their long-term oil price assumption is $70.
“Ultimately, we think management commitment to dividends and capital spending flexibility … keep dividends safe,” Morningstar said.
But investors shouldn’t expect those dividends to grow much, especially given that dividend growth was already slowing for most companies amid higher spending before the oil price dip, the analysts said.
“We think most firms will find it challenging to grow dividends given the outlook for a depressed commodity price environment,” the note says.