News Article

Equinor Cuts Dividends: Will Mexico’s Operators Follow?

By Peter Appleby | Thu, 04/23/2020 - 12:58

The oil price collapse that momentarily led to negative pricing is generating big questions among the world’s biggest operators. Having slashed budgets for 2020 and beyond ahead of what promises to be a lengthy period of price depression, majors must now weigh up their commitments to their investors. Today, Norwegian IOC Equinor cut its 1Q20 dividend by 67 percent. Could operators, including those working in Mexico, soon follow?

According to Equinor’s statement, the dividend cut is part of several “forceful actions” that the company has taken to “strengthen our liquidity and financial resilience under the current circumstances” during “this extraordinary market situation.” The Norwegian operator, which partners with BP and Total on the deepwater blocks 1 and 3, has also suspended buy-backs and issued a bond of US$5 billion.

This latest decision comes after the company cut 20 percent from its US$10-11 billion CAPEX budget for 2020. Equinor was not alone; others slashed their budgets as well. Chevron alone cut a combined US$4 billion from its future outlays.

As reported by Reuters, the world’s major oil companies have in the past kept investors happy by shying away from cutting dividends and instead “added a combined US$25 billion to debt levels in 2019 to maintain capital spending, while giving back billions to shareholders.” According to the news agency, the combined total debt for Chevron, Total, BP ExxonMobil and Shell was US$231 billion in 2019, close to levels reached during the price drop of 2016. Debts of all of these companies have risen over the last 10 years, Reuters concludes.

Considering the growing tabs of these oil majors and the oil collapse that is expected to keep prices pressured well into next year, companies will look to make cuts wherever possible. Equinor’s dividend example may be the next port of call for belt-tightening operators.

However, in the investment-thirsty oil and gas industry, companies tend to take many measures before resorting to dividend cuts. Halliburton, the world’s leading oilfield service provider, chose to furlough 3,500 staff while still intending to pay a shareholder dividend. Outside of oil, companies including McDonalds, Royal Caribbean Cruises and General Motors have been criticized for similar actions. Halliburton’s main competitor, Schlumberger, meanwhile, slashed its dividend by 75 percent.

Dividend cuts hurt a company’s stock price and have the knock-on effect of making said stock less attractive. But for companies as established as oil and gas operators, this concern is reduced. Darren Sissons, a portfolio manager at Campbell, Lee & Ross, recently told CNBC that he saw “no long-term downside to cutting the dividend temporarily and, once circumstances change, raise it accordingly.”

Oilfield activities have already been reduced around the world and delays are possible for developments in Mexico. With industry job losses mounting and prices floundering still, investors may be the next group to feel the havoc of COVID-19.

The data used in this article was sourced from:  
Reuters, Bloomberg, Mexico Business News, New York Times, Barrons, Yahoo Finance
Peter Appleby Peter Appleby Journalist and Industry Analyst