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The Majors Tout Their Resilience, And Investors Listen

As oil companies scramble to reassure investors amid a historic oil price crash, some promises ring hollower than others. 

US independent Devon Energy recently called its financial position “exceptionally strong,” while its shale-drilling peer Pioneer Natural Resources advertised its “great” balance sheet. Neither announcement, nor dozens like it, has stopped analysts from predicting a wave of bankruptcies among smaller firms and traders from yanking market value. 

But when oil majors Royal Dutch Shell and Total today made similar boasts about their finances — and left their dividends unchanged — investors believed them. Share prices of Total were up some 14% in early trading while Shell rose around 5%, even as the S&P 500 dropped over the same period. 

The immediate rebound of their share prices was a reminder of an old truism: size is a valuable asset in turbulent conditions, nowhere more so than in the oil and gas industry. Amid reports that as much as 10% of the world’s oil production could soon become uneconomic, firms without large balance sheets or the credit worthiness to sustain large debt loads could soon be flushed out of the business. 

This morning Shell said it would reduce capital spending to $20 billion for 2020 from its previously planned $25 billion and halt its share buyback program. It didn’t specify where exactly it would make those spending cuts, but said it expected them to free up an extra $8-9 billion in free cash flow on a pre-tax basis. 

But the major is holding fast to its dividend, at least for now: it will continue a $10 billion divestment program for 2019-2020, it said. “The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past,” said Shell’s chief executive, Ben van Beurden.

French oil major Total announced similar measures. Chief executive Patrick Pouyanne said today the firm was cutting capital spending by around 20 percent to below $15 billion and suspending its share buyback program. It mentioned no such cuts for its dividend. 

Shell and Total’s dividend yields — the ratio of dividend payouts to shares — stand at around 10-15%, a historically high level that means the firms are paying through the nose to keep shareholders happy, and that might ordinarily signal that a cut is imminent. But large companies that expect to stick around for the long haul are loath to take that step. They know that investors are scrutinizing dividends for signs of weakness. 

“Nobody wants to be the CEO who cuts the dividend,” Janus Henderson’s Noah Barrett told Bloomberg. “They understand that any company that cuts, its shareholders will flow into competitors and be very, very hesitant to ever come back.” 

The biggest oil companies have been around for generations, and their dividends have come to symbolize their longevity. Founded in 1907, Shell has famously declined to cut its dividend since World War Two. Downsizing it now might shatter the illusion that investors can count on it as a safe harbor. 

Shell and Total are hardly alone among large oil firms in slashing capital spending plans. 

Norway’s Equinor said yesterday it was suspending its share buyback program and cutting capital spending, while Italy’s Eni, the UK’s BP and US’ ExxonMobil and Chevron have all said much the same. None has said much about their dividends.

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