The 2020 coronavirus pandemic has destroyed more demand in the oil industry than ever before in history. The steps taken by governments to arrest the spread of the virus that causes COVID-19 have cut oil consumption by 25% or more. In the U.S., gasoline consumption has fallen to levels last seen during the Vietnam War.
And even though oil prices have rebounded since U.S. crude futures went negative on April 20, the worst is yet to come for many oil companies: Oil production continues to exceed demand, and storage facilities run out of spare capacity. We've already seen several prominent oil companies go bankrupt, and more bankruptcies are coming.
But even amid the turmoil, one integrated oil and gas giant continues to deliver solid results, and is keeping its promise to shareholders. On May 6, Phillips 66 (NYSE:PSX) declared a quarterly dividend of $0.90 per share, the same amount it paid last quarter -- while many other oil stocks slash dividend payments just to stay afloat.
A strong track record of paying dividends even as others have to cut
If there's one thing to knock about Phillips 66's dividend this quarter, it's that it didn't go up. That breaks the company's streak of increasing the payout at least once every year since 2012, when it was spun out of ConocoPhillips (NYSE:COP) as a stand-alone company. Over that nearly eight-year period, the dividend has grown 350% from $0.20 per share to the current $0.90 per share.
But looking beyond the broken streak of annual dividend growth, Phillips 66 is a rarity in the oil patch in that it was able to maintain its payout, while plenty of other midstream companies have had to cut their dividends to make ends meet. Moreover, as oil producers run into a cash crunch, and the sea of crude in storage keeps the oil from flowing out of the ground, more high-yield midstream stocks will be forced to cut their payouts soon.
Why Phillips 66 can keep its dividend going
Many of the oil companies that have had to cut their dividends during this unprecedented crash have had their hands forced by market conditions related to their main business. We've seen just about every independent oil producer that pays a dividend have to cut the payout, as oil prices and demand have fallen sharply, cutting off a significant portion of their cash flow very quickly.
One of the most notable is Occidental Petroleum (NYSE:OXY), which entered the oil crash in dire straits after last year's $55 billion acquisition of Anadarko Petroleum. As a result, the company had to cut its payout more than 80% and is still in financial trouble.
Phillips 66 is in a position to keep its dividend in place because its operations insulate it from much of the downside of oil prices, and it also counts on a far more stable business -- natural gas -- to fuel a big part of its earnings and cash flow.
What to expect
While a payout cut in the future can't be completely ruled out, my expectation is that Phillips 66 management will continue to act prudently to maintain or even raise the dividend in coming quarters. On the first-quarter earnings call, CEO Greg Garland described the dividend, which costs about $400 million per quarter, as "very affordable" based on the company's cash flow.
One of the reasons it's affordable is because management keeps debt to very conservative levels so the company can manage through the oil market's cycles. As chief financial officer Kevin Mitchell put it on the earnings call, executives want to "come into times like this, [with] the ability, the capacity to issue some incremental debt, weather the storm, come through the other end, and not have a detrimental impact on credit ratings and our ability to access debt markets."
So while other oil companies entered the downturn heavily leveraged and with limited -- or no -- options beyond cutting their dividends, Phillips 66 is able to keep its promise to pay shareholders to ride out the downturn along with the company. That's a big part of why Phillips 66 remains my top oil stock to own through the 2020 oil market crash.