Shareholders question dividend policy of oil majors
Large international oil companies are facing disagreements among their shareholders over whether they should maintain their dividend payments in the face of the plunge in crude prices.
Companies such as Royal Dutch Shell and Chevron insist that they will keep their dividends unchanged, even though they are failing to cover payments from cash flows.
Some investors are warning the big European oil groups against cutting dividends amid fears it could provoke an exodus of shareholders who have become used to high payouts against a backdrop of low global interest rates.
“Many investors rely on the big oil groups for dividends as they are some of the biggest payers. Cuts would not be welcomed by investors,” said Matthew Beesley, global head of equity at Henderson and an investor in BP, Total and BG, which is soon to become part of Royal Dutch Shell.
Shares in Shell and BP offer yields of more than 8 per cent, putting them among the top 10 payers in the FTSE 100.
ExxonMobil, Chevron, Shell, BP and Total, the five largest western oil companies, paid out a total of about $46bn in dividends last year.
For big oil companies, cutting dividends would raise fundamental questions about their proposition to investors. They have mostly been increasing their output only slowly, if at all, and in the view of some analysts are too exposed to relatively high-cost assets such as deepwater oilfields and liquefied natural gas projects.
“For big oil CEOs, it would always be a difficult call to cut the dividend,” said Eric Oudenot of the Boston Consulting Group. “It could be the last decision they would make in that job.”
Eni of Italy cut its dividend last year, and has been followed recently by US exploration and production companies including ConocoPhillips and Anadarko Petroleum as they seek to keep borrowings under control while investing — albeit at lower levels — in future production.
Charles Whall, of Investec Asset Management, which holds shares in BP, Shell and Total, said the European companies were not like the US groups that had cut payouts. BP and Shell had stronger balance sheets and unlike the US production companies they had refining divisions that were not hurt by the fall in crude prices, he said.
“The financial flexibility the big oil majors have means they should be able to maintain their dividends. Only a multiyear recession might force them to cut.”
Large US institutional investors are increasingly sceptical about companies’ enthusiasm for distributing cash.
One large shareholder in the oil majors said: “Outside of Exxon, I don’t think any upstream company should pay a dividend and I don’t think any European major is in a position to pay a dividend in the next two or three.”
The investor added: “Companies are borrowing money to pay a dividend while they are not investing enough to maintain production and that is not a sustainable model.”
US investors have also been raising concerns about share buybacks.
Bess Joffe, head of corporate governance at TIAA-CREF, which is a Top 20 shareholder at Exxon and Chevron, and also has significant stakes in the European oil majors, said her organisation would be paying close attention to executive pay, to make sure that managers were not artificially keeping the share price up — for example through share buybacks — so as to keep their own bonuses high at the expense of long-term investment.
All of the large oil companies have suspended share buyback programmes, although Exxon was making purchases in the fourth quarter of last year.