As most investors know, the steep collapse in oil prices during he past year has put Big Oil in a very uncomfortable position. Crude oil traded above $100 per barrel in the United States at its highest point last year, then went on a prolonged decline all the way to $45 per barrel. The price of oil has recovered somewhat since then, but the scars are still there for all to see.
During the oil crash, investors suffered dividend cuts and suspensions from a number of firms, including oil drillers and upstream MLPs. However, one group that has remained relatively unscathed is the integrated oil and gas companies. These are the global super-majors that operate upstream and downstream businesses, encompassing both exploration and production, as well as refining.
This diversified operating structure is giving Big Oil some much-needed balance, while other companies that are extremely vulnerable to falling oil prices crumble. In turn, profits of the integrated majors are holding up relatively well.
It might sound crazy to suggest, but I believe two of the world's largest Big Oil members, ExxonMobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX), will increase their dividends in the coming days.
Refining to the rescue
It goes without saying that upstream exploration and production profits are falling. This is squarely due to the oil crash. Chevron's total profits fell 10% last year, to $19.2 billion. Not surprisingly, this was due mostly to Chevron's oil and gas exploration and production business, where profits declined by 18% in 2014.
However, downstream refining served as a nice offset to the upstream deterioration. Thanks to stronger refining spreads, downstream profits nearly doubled, to $4.3 billion for the year. ExxonMobil's profits remained flat in 2014 from the prior year, at $32.5 billion. Like Chevron, ExxonMobil got a major contribution from refining profits, which totaled $3.1 billion for the year.
Even though it's disappointing to see profitability decline, all things considered, it could have been much worse for ExxonMobil and Chevron. This demonstrates the clear benefit of diversified operations across both the upstream and downstream businesses.
Raising cash helps support higher dividends
Not only are profits coming in better than expected thanks to refining, but both ExxonMobil and Chevron are aggressively raising cash, which could be used to fund higher payouts. For example, Chevron announced it wouldn't buy back any stock in 2015. Previously, the company had been executing repurchases at a rate of about $1.25 billion per quarter, which will save about $5 billion this year.
ExxonMobil isn't suspending buybacks, but it is tapping the debt markets in a big way to raise cash. In March, ExxonMobil conducted an $8 billion debt offering, which was the largest in its history. The capital markets are still very much open to ExxonMobil, since it's one of only three U.S. companies to hold a triple-A credit rating from Standard & Poor's.
In addition, both companies are significantly reducing their capital spending this year, and selling assets, to save even more money. Last year, ExxonMobil cut capital expenditures by 9%, and sold $4 billion of assets during the year. This year, it's going to reduce spending by another 12%. Meanwhile, Chevron plans a similar 13% reduction in its own 2015 capital spending budget. Plus, Chevron plans to sell $15 billion worth of assets through 2017, after divesting $6 billion last year.
Expect dividend increases very soon
Chevron and ExxonMobil are set to report quarterly earnings during the next few days. It's been one full year since they last increased dividends, which means they're due to give shareholders another pay raise. Because both companies are members of the exclusive Dividend Aristocrat list -- which means that they have raised dividends for at least 25 years in a row -- it's a good bet they will keep their streaks intact.
That being said, it's likely the dividend increases will be modest. Times are very tough for Big Oil. Profits are staying afloat thanks to refining, but exploration and production still accounts for the bulk of their profits.
Still, because they have each raised a lot of cash through asset sales and spending cuts, I wouldn't be surprised to see both companies increase dividends in the 4%-6% range.