The world's biggest oil and gas firms should break an industry taboo and consider cutting dividends, rather than taking on any more debt to maintain payouts as they weather the fallout from the coronavirus pandemic, investors say.The top five so-called oil majors have avoided reducing dividends for years to keep investors sweet and added a combined $25 billion to debt levels in 2019 to maintain capital spending, while giving back billions to shareholders.
The strategy was designed to maintain the appeal of oil company stocks as investors came under increased pressure from climate activists to ditch the shares and help the world move faster toward meeting carbon emissions targets.
Now this strategy is at risk. Oil prices have slumped 60 per cent since January to below $30 a barrel as demand collapsed because of the pandemic and as a battle for customers between Saudi Arabia and Russia threatened to flood the market with crude.
"Long term, it is appropriate to cut the dividend. We are not in favor of raising debt to support the dividend," said Jeffrey Germain, a director at Brandes Investment Partners, whose portfolio includes several European oil firms.
The combined debt of Chevron, Total, BP, Exxon Mobile and Royal Dutch Shell stood at $231 billion in 2019, just shy of the $235 billion hit in 2016 when oil prices also tumbled below $30 a barrel. Chevron was the only one to reduce its debt last year.