By cutting spending, companies aim to protect returns to energy investors who count on dividends as a safe haven from commodity price risks.
ConocoPhillips emphasized today it will protect its dividend above all else, even if it has to increase its dependence on debt. Additional borrowings might reduce the company’s credit rating, but not below investment grade levels, Chief Financial Officer Jeff Sheets said in an interview.
ConocoPhillips investors need to understand that the dividend is “part of their return they will get on our shares that they don’t have to be concerned is going down,” Sheets said. ’’The fact that you’ve committed to that level of payout is going to make you very disciplined about your level of capital investments as well.’’
Occidental today reported its first quarterly loss in more than a decade, and ConocoPhillips and Hess Corp. also saw their first three-month losses in years. Shell reported higher fourth- quarter earnings, but still fell short of analysts’ expectations.
Not Sustainable
The severe spending cuts aren’t a sustainable strategy for oil companies, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas. Producers must invest in new oil and gas wells for the future to replace dwindling production from older wells.
Shell’s van Beurden today warned that canceling or delaying too many projects could jeopardize supply over the longer term.
“They find themselves with the difficult choice of reducing spending or dividends,” Bullock said. “Many are choosing to continue paying shareholders, since investing more amid low prices would be seen as providing sub-par returns. Cutting dividends could bring a crushing response from investors.”
Some smaller companies are making that hard choice. Canadian Oil Sands Ltd. is likely to cut its dividend when it reports earnings later today, Menno Hulshof, an analyst with TD Securities Inc. in Calgary, said yesterday in a note to investors.
Holding Fast