Dividends Are Back In Vogue Again for Energy Companies

Earnings season is in full swing. In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman dive into the most important takeaways from the biggest energy companies in the sector -- ExxonMobil (XOM -0.09%), Phillips 66 (PSX -2.51%), Cabot Oil & Gas (CTRA), and more -- and what they mean for the still-struggling sector going forward.

Taylor Muckerman: We'll cover some of the big guys. You had a couple dividend raises, surprisingly.

Sean O'Reilly: No way, who?

Muckerman: Exxon, Phillips 66, and Cabot Oil & Gas, to name a few. No dividend cuts this quarter so far. That's a good sign. I don't know if they should be raising dividends at the moment, but at least we're seeing some stability here.

O'Reilly: They're like Bon Jovi, they're "Livin' on a Prayer."

Muckerman: Very strong for earnings compared to last year. They had some easy comps. And the cost cuts are about fully baked in, so the margins are helping out a little bit there. But Exxon's $4 billion profit was a 122% increase from the first quarter of last year, and they almost doubled cash flow.

O'Reilly: That's what I'm pulling up here, I have to see for myself.

Muckerman: Yeah, cash flow of $8.2 billion versus $4.8 billion last year in the first quarter. 

O'Reilly: I have to think, last year, that was helped with the refinery margins. So now, it's a flip-flop of some sort.

Muckerman: Yeah, but they actually produced less oil on an equivalent oil basis, year over year, of like 5%.

O'Reilly: Yeah, there it is. Not that I didn't believe you, but cash from operations over at Exxon, over $8 billion, and capex of $2.89 billion. That's $5 billion in free cash flow.

Muckerman: Yeah. Lowering capex is really helping some of these companies out. You look at Shell, $9.5 billion in cash flow.

O'Reilly: Long term, that's bad. But for now...

Muckerman: Yeah, long term, that could be bad. So, you see Shell covering their dividend with cash flow, and being able to do stuff.

O'Reilly: They bought $3 billion in stock, did you see that?

Muckerman: Who did?

O'Reilly: Exxon. They bought back $3 billion in stock in the quarter.

Muckerman: Oh. That's nothing new for them, to return money to shareholders.

O'Reilly: Yeah. They've literally said, "We'll take on debt to do it." [laughs] Remember when [Fool energy contributor Tyler] Crowe used to be like, "They're just taking on debt and paying it out." I was like...Exxon is special.

Muckerman: Yeah, they are special, and they're big enough to be special. If you look at some of the sell-offs that we've had in the last couple years, if you take Exxon and Chevron, they account for 40% of the S&P 500 energy sector.

O'Reilly: Oh my gosh. The stock hasn't even fallen that much.

Muckerman: No. They're just so dang big.

O'Reilly: Good for them. Why did you bring up Cabot?

Muckerman: Cabot Oil & Gas? Because they actually raised their dividend, along with Phillips 66 and Exxon.

O'Reilly: Oh, that's right, what was up with that?

Muckerman: I didn't dive too deep into their earnings to be able to tell folks my opinion on whether or not it was prudent. But they're not necessarily as big as the other companies raising their dividend, so it came as a bit of a surprise to me. But you're seeing integrateds, you're seeing refiners, you're seeing upstream oil and gas companies. So, there's a decent mix of companies raising their dividends. But then again, nobody has cut the dividend yet.

O'Reilly: Well, they did last year.

Muckerman: This quarter. No, last year...

O'Reilly: Yeah, Cabot was free cash flow positive. $269 million cash from operations in the quarter, $208 million capex.

Muckerman: Yeah, you saw it last year, Conoco, Kinder [Morgan], Anadarko, Chesapeake, you name it, they were all cutting dividends last year. 

O'Reilly: I have to wonder what's going on in these boardrooms. They're just like, "OK, one of the reasons people invest in us is for these dividends, let's call a spade a spade."

Muckerman: Yeah, for better or for worse, investing in energy is dividend-oriented for a lot of people, yeah.

O'Reilly: So, they plugged their noses last year, and were like, "OK, we're going to cut. We'll probably get a pass because this is the Dark Ages of oil prices."

Muckerman: Yeah, "We're not the only company doing it." Some of them didn't get a pass, though. Some of them sold off quite significantly because of it.

O'Reilly: Yeah, and some went under. [laughs] I have to wonder, you see the capex cuts, and that's going to have ramifications long term. They're not finding more oil --

Muckerman: Not that they're not finding it, they're just not really trying to find it and develop it.

O'Reilly: Yeah. That money will have to be invested at some point.

Muckerman: That's what people are saying. There could be a supply crunch in the early 2020s, is what they're saying, because a lot of the projects that folks were investing heavily in in 2013 and 2012 to 2014 are now coming on line, and they're not replacing that pipeline, so to speak. So, there are some worries. It all depends on how demand fares over the next five to six years, though.