The first-quarter earnings season proved to be brutal for the integrated oil and gas majors, and the pain is only expected to intensify in subsequent quarters as the coronavirus-induced hit to the economy continues to keep oil prices depressed, analysts said.
In the first three months of 2020, Exxon Mobil Corp. posted a loss for the first time in more than 30 years and Royal Dutch Shell PLC took the market by surprise, cutting its dividend for the first time since World War II as oil prices plunged in response to a supply glut and demand destruction caused by shelter-in-place orders around the globe.
"What was the world's largest dividend is no more," Jefferies analyst Jason Gammel wrote in a May 1 note to clients. "Shell's decision to cut its dividend came sooner and went far deeper than we had expected."
Generally, oil companies aim to protect dividends in times of financial distress, focusing instead on capital discipline and operating efficiencies as a way to preserve capital and defend their bottom lines. To stave off the plunge in oil prices, Shell was the second company to reduce its dividend, following the lead of Norway-based Equinor ASA.
Shell was worried about reducing its high debt even before the oil market meltdown, and, like its peers, moved swiftly to address the oil price rout by cutting 2020 capital spending by at least $5 billion, trimming operating costs by as much as $4 billion and halting its massive $25 billion share buyback program. The dividend reduction is another countermeasure, but typically one used as a last resort.
"Dividend reductions reflect capital management failures from years past," Evercore ISI analyst Doug Terreson wrote in May 1 note to clients. "Management credibility is clearly impaired."
Shell CEO Ben van Beurden defended the dividend cut on the company's first-quarter earnings call. "Had we not reset a dividend and had we resorted to just more capex and [operating expense] cuts to somehow keep this going and continue to borrow money to do so, which I think would be highly irresponsible, we would have had zero room to maneuver until we were at the brink and then we had to maneuver nevertheless," he said.
If any of the European majors had been expected to cut its dividend due to a less-than-stellar balance sheet, it was BP PLC, analysts had said. But BP executives indicated during the company's first-quarter earnings call that the London-based oil major will maintain the payout to investors, even though its debt has now risen to the highest level in several years.
At the end of the first quarter, BP's debt was $51.4 billion, up from $45.08 billion a year earlier, and gearing — a measurement of financial leverage — rose to 36%, up from 31.1% in the fourth quarter of 2019 and well above the top end of the company's forecast range of 20% to 30%.
"Management was non-committal on the dividend in Q2 and expects the [BP] board to reconsider distributions on a quarter-to-quarter basis. This is understandable in a macro backdrop where oil prices can fall into negative territory," Gammel said in an April 28 note.
The U.S.-based majors, meanwhile, are taking a different tack to address the epic oil price crash, with Exxon and Chevron Corp., which had one of the strongest balance sheets of the majors heading into the quarter, both opting to rein in upstream production around the world, including in one of the world's hottest oil plays — the U.S. Permian Basin.
Announcing a second round of spending cuts for this year that will bring the total as low as $14 billion, Chevron CEO Mike Wirth said by the end of the second quarter, the company's upstream rig count will be cut by 60%. In May, Chevron expects to curtail between 200,000 and 300,000 barrels of oil equivalent per day of production, with additional curtailments in June, Wirth said on the company's May 1 first-quarter earnings call.
Exxon said it would slash the number of its rigs across the Permian by 75% over the course of this year, ending 2020 with 15 rigs in the basin.
