The Country Caller takes a look at why Exxon and Chevron might be forced to cut dividends
Crude oil prices started their falling trend in July 2014. The US shale boom allowed oil and gas companies to extract more oil than before, by naturally expanding the digging plan. The rising supply thus created a supply glut and caused prices to fall significantly. Initially, when the prices started falling, analysts were of the view that this was for a short term and that prices would rebound soon.
They were mistakenly backing the Organization of Petroleum Countries (OPEC) to intervene like they always had. But to their dismay, the cartel decided to maintain output.
Now even after two years, prices remain depressed and continue to remain highly volatile. On Wednesday, West Texas Intermediate (WTI) came down 0.41% at $46.16 per barrel, whereas Brent Crude was down 0.60% at $48.08 per barrel, which is the scale to measure global rally in oil prices.
Integrated Oil & Gas companies have a robust history of maintaining dividends. Even after a decline in dividends, the company’s stock prices haven’t been impacted as of other smaller players. But now, however, it may seem that things are changing.
As reported by Bloomberg, Chris Kettenmann of Macro Risk Advisers has forecasted that the biggest producers of the world would struggle with making some $40 billion in yearly dividend payments. According to Kettenmann, companies such as Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), Royal Dutch Shell plc. (ADR) (NYSE:RDS.A) have engaged in massive cost cutting measures including capital expenditure reductions, asset divestitures and employee layoffs.
Recently, Exxon, due to its dividend payment agenda, managed to lose its AAA credit rating from the S&P. Analysts such as Kettenmann raised questions over the strategy and regarding the issue said: “They might be able to borrow to pay it but it raises this question about sources and uses of capital.” He further added: “Are you really growing value within the company spending $12 billion a year on share distributions versus investing in projects that are generating a rate of return for investors?”