New World Trumps Old World in Integrated Oil
U.S. firms hold greater dividend safety, better assets, and more attractive valuations than their European counterparts.
As a "lower for longer" oil price scenario has become consensus, investors have begun to worry about the sustainability of integrated oil companies' dividends, pushing yields near 20-year highs. We think in most instances the concern is overblown, as increasing capital flexibility will allow firms to trim investment budgets to ensure dividend safety. The companies with the most at-risk dividends ( Total (TOT), Shell (RDS.A), and BP (BP)) have taken the additional step of offering scrip payouts to further preserve cash. While this will improve their cash coverage ratios, asset sales will still be necessary for these firms to fund future shortfalls, leaving any potential for dividend growth unlikely. Of the integrateds, Total's and Shell's dividends look to be the most at risk, but payouts would only be cut if oil prices do not recover to $70 a barrel longer term. As a result of this and other factors we will discuss, we prefer the higher-quality U.S. firms.
Whether dividends can be sustained is an understandable concern. Yields that in some cases sit at 20-year highs imply the market's growing doubt about sustainability and signal a warning or an opportunity, depending on the point of view. Compounding the issue are balance sheets that for the most part were in worse shape entering the current downcycle than the last one in 2008.
Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.