London’s ‘big oil’ dividends are “safe for now” according to analysts at Jefferies, but, at the same time the broker warned that the sector can’t withstand low crude prices for very long.
“The financial condition of the sector was reasonably strong entering the downturn and companies have ample liquidity to fund what will likely be cash-flow deficits in 2020 and 2021,” said Jefferies analyst Jason Gammel.
“We expect that dividends in the sector are safe for now, but if Brent prices remained at US$30 through 2021 balance sheet deterioration would bring the dividend into question.”
The analyst added: “The integrated oil sector has many options for dealing with the oil price collapse, and we expect most of them to be exercised.
“This will almost certainly include putting more leverage on the balance sheet.”
Gammel noted that “nothing works” at US$30 per barrel crude and that shareholder expectations for increased returns are no longer viable.
Share buy-backs have been suspended, dividends can be retained but in due course could return to scrip payments rather than cash.
Jefferies noted that Royal Dutch Shell Plc (LON:RDSB) has already moved to cut its capital budget to US$20bn and intends between US$3 to US$4bn of operating expenses over the next year – meanwhile, it has also suspended its share buy-backs.
The broker expects that Shell’s dividend will exceed free cash flow by US$12.1bn through 2020 and 2021.
Shell’s oil price sensitivity is said by Jefferies to be at around US$600mln per US$1 per barrel movement in the crude price.
Similarly, for BP the broker expects dividends to exceed free cash flow by around US$7.5bn over 2020-2021. And Jefferies noted an oil price sensitivity of around US$340mln per US$1 per barrel.