In a volatile commodity market, it's not exactly easy to maintain a stable, growing dividend year in and year out. But for more than 25 years, both ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) have been able to pay shareholders dividends, and increased them almost like clockwork.
With the price of oil now touching just below $30 a barrel for the first time in a dozen years, and not a lot of confidence that prices will improve much for a while, there's growing concern that these dividend aristocrats are in danger of what would have seemed unthinkable just 18 months ago: a dividend cut.
Are ExxonMobil's or Chevron's businesses under so much duress that they may lose their dividend aristocrat status in 2016? Let's take a look at what each company has going for it, and whether it will be enough to prevent them from needing to do anything drastic this year.
Working in their favor
One thing that you have to remember is that the price of oil isn't the only variable when it comes to ExxonMobil's and Chevron's profits; there's also the effect of cost. During the past year, many of the costs that go into the company's daily operations have declined significantly.
This isn't just from the company making internal cuts, like letting some of their people go, but also from the lowering of costs to hire contractors and oil services providers. During the past 12 months, costs for various high-priced services have dropped by as much as 40%-50%.
Chevron has said that its cost savings on services have been similar to the ones that ExxonMobil is showing in this presentation. They may not be enough to make every barrel of oil produced profitable at $30 a barrel, but it will certainly make life a little easier.
Of all of the integrated oil and gas companies, Chevron's stock is the one that is most adversely affected by the downslide in oil. That's because its peers have more robust refining and chemical manufacturing businesses, while Chevron's percentage of earnings that come from production are the highest. As oil prices have declined, Chevron's cash flow has evaporated the fastest.
|Company||Cash from Operations (Q3 2013, in millions)||Cash from Operations (Q3 2015, in millions)||% Change|
|Royal Dutch Shell||$10,409||$11,231||8%|
What is also making the company's dividend payments so challenging right now is that its capital expenditures are still trending rather high, as Chevron looks to complete a few massive capital projects like Gorgon and Wheatstone LNG.
What's causing the company's cash situation be so tight today, though, is part of the reason why it might have the ability to keep its dividend payments steady over the longer term. During the next year or so, as many of these new projects come online, Chevron is going to be able to drastically cut its capital expenditure budget in 2016 and into 2017.
Not only do we need to consider that Chevron could potentially cut its capital budget by 42% during the next 12 months, but these under-construction projects will stop eating into cash flows as much as they have. Gorgon and Wheatstone alone will represent a 13% uptick in production, and the previously negotiated supply contracts should provide a decent boost of cash, even if oil prices were to remain as low as they have been.
There's no question that $30 per-barrel oil will severely constrict the company's ability to generate cash and earnings for shareholders, but the wild swing in spending expected during the next 12 months, coupled with some marginal uptick in cash flow from start-ups, might just be enough that the company's budget is close to balanced in 2017. It may take a couple of hits to the balance sheet this year to get there, but it's not an unobtainable goal.
Unlike Chevron and the other integrated majors that are a bit more reactive to the price of oil, ExxonMobil has historically been the company that has maintained a more consistent capital budget through the good times and bad. The company didn't overreach as much as the others with its budget during the past couple of years; investors may argue, though, that it overreached a little.
Even though ExxonMobil seems to have no plans to cut spending as drastically as others, its ability to meet current spending obligations has not deteriorated as much as its peers. It was still producing enough cash to cover its capital expenditures...
...and hasn't needed to blow up the balance sheet to pay the rest.
Another thing to consider is that ExxonMobil still has an extra lever to pull to sustain its dividend that so many others in the space have already abandoned: its share repurchase program. During the first three quarters in 2015, Exxon's management spent $3.2 billion on share repurchases, and is expected to spend another $500 million in the fourth quarter. If cash were to get even tighter during the next year with oil prices as low as they are, that's more than $3.5 billion that can be allocated toward other spending.
Like Chevron, this isn't ideal, and prices in the $30 per-barrel range will likely result in lower cash inflows. That being said, it still has some firepower to protect the dividend at least through 2016.
What a Fool believes
Probably the best question for both Chevron and ExxonMobil isn't if they can maintain dividends to shareholders with oil at $30 a barrel, but how long can oil prices remain this low before the two companies really need to take drastic measures. If oil were to remain at $30 a barrel in perpetuity, then, of course, they would both need to cut their dividends and completely reevaluate their asset portfolios. At the same time, if there's a rapid return to something like $60 a barrel, then chances are they'll do ok.
With non-OPEC production starting to show signs of decline, and exploration and production spending getting reduced as much as it has lately, chances are we will start to see a price recovery sometime this year. If that is the case, then a few months at $30 a barrel shouldn't be the end of ExxonMobil's or Chevron's dividend streaks.