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Is Oil's Dividend At Risk?

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Oil has experienced one of the most vicious selloffs in history, with WTI crude plunging over 60% since the beginning of the year to its lowest levels in over 2 decades. Now analysts are worried that the price of oil could go negative, and energy companies would be forced to pay customers to take the commodity off their hands.

Oil began to slide when the novel coronavirus took hold of China at the beginning of the year, which spurred the start of the oil price crash with demand concerns being the key catalyst. The virus’s global spread and evolution to a pandemic further escalated energy demand anxiety.

Now Saudi Arabia and Russia are engaging in a price war. Both nations are ramping up production in a battle that is hammering oil companies around the world. The market is flooded with supply and demand is drying up, the perfect storm for an oil price crash.

Is Oil’s Dividend At Risk?

Companies like Chevron (CVX - Free Report) , ExxonMobil (XOM - Free Report) , and British Petroleum (BP - Free Report) has been providing investors with a consistent dividend for close to a century. These companies are now experiencing a massive cash flow issue that could put these long-standing dividends at risk.

These three stocks have plummeted more than 45% since the beginning of the year as investors worry about the survival of the energy sector. With WTI crude teetering around the low $20s and Brent trading around $30 per barrel, these firms will be losing money until oil demand resumes.

Maintaining dividends is the oil industry’s biggest priority right now, and I believe they will be able to sustain it for at least 2020. The energy sector’s financial positioning was healthy coming into this downturn, and liquidity remains robust.

To maintain current dividend levels, firms are going to be forced to substantially cut costs, including cap-ex and operational expenses, which will put a pause on growth. We can expect that balance sheets will slowly deteriorate until demand can be reestablished.

Financial Positioning 

As the price of these stocks plummet, their yields skyrocket. These healthy yields are the only thing attractive about these stocks right now, and the companies do not want to risk losing it. Here is a look at their liquidity.

BP (BP - Free Report) – 13.5% yield

BP is currently holding $26.8 billion in cash & equivalents combined with a $10 billion line of credit, which gives the firm roughly $37 billion in liquidity. BP is the most liquid of its competitors, with its liquidity more than covering its debts through 2022.

“BP’s cash flow sensitivity to oil price is $340m for $1/bbl,” according to Jefferies Equity Research. BP is the most hedged of its competitors, with crude price changes impacting its cash-flows the least.

Chevron (CVX - Free Report) – 9.5% yield 

Chevron has a $5.75 billion in cash & equivalents combined with a $9.75 billion line of credit, giving the company $15.5 billion in liquidity. CVX’s liquidity covers 80% of its debts through 2022.

“Chevron’s cash flow sensitivity to oil price is $500m for $1/bbl,” according to Jefferies Equity Research.

ExxonMobil (XOM - Free Report) – 11% yield  

Exxon has $3.1 billion in cash & equivalents but issued $8.5 billion in bonds last week, bringing its cash levels up to $11.6 billion. XOM’s liquidity covers roughly 75% of its debts through 2022.

“Exxon’s cash flow sensitivity to oil price is $600m for $1/bbl,” according to Jefferies Equity Research.

Take Away 

I would not be rushing to get into oil stocks at this time as a further downslide to oil prices may be on the horizon. The concept of negative oil prices is sending fear down the spine of energy executives around the world.

This oil supply glut will not last forever and suspect that once demand resumes (hopefully later this year), the fear of dividend cuts will be alleviated, and energy stocks will rebound.

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