The first two days of this week have seen seesawing oil prices. The decline in demand amid the coronavirus threat and OPEC+ producers’ inability to crack an output cut deal mainly dragged down oil prices.
Russia objected to Saudi Arabia’s proposed plan to cut production to manage the impact of coronavirus, probably to win back its title of the world’s largest oil producer that it lost to America in 2018.
If this wasn’t enough, Saudi Arabia’s shocker of a decision to increase crude output starting next month by about 12.3 million barrel per day caused an oil crash on Monday. Russia also hinted at an output boost of 0.5 mb/d.
Demand side is also shrinking. The International Energy Agency warned that oil demand will possibly decline in 2020 for the first time since 2009.
Though oil prices bounced back on Mar 10, the rally will not last if there is no end to the Saudi-Russia’s ‘pump-at-will’ program. After Saudi’s shocking announcement of output boost, there was a volley of announcements regarding capex cuts from American producers.
Cenovus Energy (CVE - Free Report) cut capex by 32%. It also lowered production target to 432,000-486,000 bpd from 472,000-496,000 bpd, per oilprice.com. Ring Energy (REI - Free Report) said it would halt drilling until oil prices recover. Ovintiv (OVV - Free Report) retreated about 70% on Mar 9 only to rebound sharply the day next. The oil company would slash spending to sustain free cash flow, per oilprice.com.
Capex Cut Likely to be Followed by Dividend Cuts
Investors should note that if we have$20/$30 oil for long, drillers are likely to go bankrupt. This in turn might lead them to miss out on payments to midstream companies (which are high-yielding in nature) for transporting oil. If this happens, midstream companies may have to bring down their high dividend payouts, per an article published on Motley Fool.
Occidental Petroleum (OXY - Free Report) has already announced a cut in its quarterly dividend payout (for the first time in 30 years) by 86% to 11 cents a share from 79 cents, effective July, and will slash its capital spending to the range of $3.5-$3.7 billion from the previous expectation of $5.2-$5.4 billion. The company is also initiating other forms of cost-cutting programs.OccidentalPetroleum’s current dividend yield is as high as 25.26%.
Occidental Petroleum may just have kickstarted the dividend cut program in the oil patch. Analysts highlighted Apache (APA - Free Report) (current yield 10.47% annually) and Halliburton Company (HAL - Free Report) (yields 8.83% annually) as two other prospective candidates for dividend cuts.
"Depending on the duration of the crude down-cycle," Goldman Sachs expects Chevron (CVX - Free Report) to slow down its buy-back program and ExxonMobil XOM to lower its $33-billion spending plans in 2020 and dividend growth.
Energy MLPs, which are known for outsized yields, will feel the heat too. MLPs used to secure more debt to finance their gigantic projects and increase their distribution. But if oil prices reel under this much pressure, investors may lose faith in MLPs.
ETFs in Focus
Occidental Petroleum has considerable exposure to VanEck Vectors Unconventional Oil & Gas ETF (FRAK - Free Report) , Invesco S&P 500 Equal Weight Energy ETF (RYE - Free Report) and Energy Select Sector SPDR Fund (XLE - Free Report) . Apache too has a sizable focus on RYE and FRAK. Meanwhile, HAL puts solid weights in iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) and VanEck Vectors Oil Services ETF (OIH - Free Report) . So, investors can expect a dividend yield cut in these funds.
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