ExxonMobil sticks to its guns on dividends

OREANDA-NEWS. ExxonMobil has extended its unbroken run of raising dividends to 34 years, undeterred by a downgrade to its credit rating. But its peers show no sign of following suit while cash flow deficits persist.

The company declared a 3pc increase in its second-quarter dividend to 75¢/share from 73¢/share in the first quarter, two days after ratings agency Standard & Poor's (S&P) lowered the firm's credit rating by one notch to AA+. ExxonMobil's credit metrics no longer meet the threshold for the top grade AAA rating, partly because of "low commodity prices, high reinvestment requirements and large dividend payments", S&P says. The firm's refusal to pause dividend growth in the face of falling profits and rising debt is unique among its peer group.

Other firms have adapted their shareholder distribution policies in the lower oil price environment. Italy's Eni cut dividends in 2015, followed by Spanish firm Repsol and Austria's OMV this year. Shell, BP, Total, Chevron and Norwegian state-controlled Statoil have not increased dividends since 2014. "We have long said that we will raise the dividend when our cash flow and our profit allow it to be sustained," Chevron chief financial officer Pat Yarrington says.

Some firms have gone a step further to ease their cash commitments by offering a scrip dividend, which gives shareholders the option to be paid in new shares rather than cash. Statoil is the latest to do so, following BP, Shell, Total and Repsol. It is "a tool to strengthen financial capacity to invest in profitable projects in a low, volatile and uncertain price environment", Statoil says.

ExxonMobil has followed the other majors in suspending share buy-backs to save cash, with the exception of repurchases to offset dilution related to its employee benefits plan. But "we remain steadfast in our commitment to pay a reliable and growing dividend", it says. This is partly because of the strength of ExxonMobil's balance sheet. The firm's net debt has increased by over $20bn since crude prices started falling in mid-2014, but its net debt-to-equity ratio, or gearing, was the lowest of the majors at the end of the first quarter.

ExxonMobil is relaxed about taking on more debt to plug funding gaps this year and insists that its "ability to access financial markets on attractive terms remains strong", despite the downgrade to its credit rating. But the company does not expect to lean on its balance sheet for too much longer. "We have good potential to reach cash flow neutrality, particularly in 2017," it says. ExxonMobil expects to be able to cover dividends from free cash flow at $40/bl next year, underpinned by its drive to cut capital expenditure (capex) and operating costs.

All the majors share the target of balancing cash in and cash out next year. Chevron said in March that its spending plans will enable it to be cash flow neutral next year at a $52/bl oil price. But "we are committed to balancing at any reasonable price," Yarrington says. "If a lower price environment persists for longer, we will adjust and pursue even more significant cost savings and even greater cuts in capex to continue to lower our cash flow breakeven."

Shell has steered clear of giving a breakeven price forecast for 2017, with much depending on the timing and quantity of asset sales and next year's capex budget. But the company has a similar view to Chevron. "We will do whatever it takes to balance the financial framework through the cycle," Shell chief financial officer Simon Henry says. BP and Total expect to balance the books next year at $50-55/bl and $60/bl, respectively, excluding the impact of asset sales. BP does not factor in future Macondo oil spill payments, and expects to meet these from divestment proceeds.

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