This weekend's history among the major oil-producing countries to introduce the biggest drop ever in their combined production has sparked hopes that could potentially recover this year, leaving the largest US oil and gas companies, have all suffered as prices for those commodities collapsed, taking increasingly painful measures to protect revenues, such as cutting their dividends.
The deal was signed by the US after the sharp drop in global fuel consumption due to the coronavirus pandemic, which was compounded by a feud between the world's largest producers – Saudi Arabia and Russia – which threatened the financial viability of North American producers.
West Texas Intermediate, the main US price benchmark, ended on Thursday at $ 22.76 a barrel, down 63% since the beginning of the year. It was even worse in Midland, Texas, where much of the oil extracted from the Permian Basin is priced, and in western Canada, where most of the country's output comes from. Oil has traded below $ 10 a barrel in both markets. After falling 3.5% yesterday to $ 22.41, WTI is up just under 1%, trading at $ 22.59.
For investors in the largest producers in the region, the next big question is whether this deal will help ensure the payouts of mega producers such as Exxon Mobil (NYSE :), Chevron (NYSE: NYSE 🙂 and Royal Dutch Shell. (NYSE :).
For years, the largest oil and gas companies in the world have been avoiding cutting their dividends, to encourage investors as the appeal of oil supplies continues to decline, along with the shift to cleaner energy sources. The top five so-called oil majors together added $ 25 billion in debt in 2019 to maintain capital expenditures and returned billions to shareholders.
According to a CNBC.com report, the combined debt of Chevron, Total (NYSE :), BP (NYSE :), Exxon Mobil and Royal Dutch Shell in 2019 was $ 231 billion, just short of the $ 235 billion hit in 2016 when oil prices also fell below $ 30 a barrel.
Chevron Weekly Price Chart
Dividend returns from oil companies, reflecting the risk investors want to take to own their shares, have also risen after the recent collapse in their stock prices. Exxon Mobil, down 39% this year, and Chevron, down 29%, are now up 8% and 6% respectively. Exxon closed yesterday's session by 0.4% at $ 42.76, while Chevron ended 0.7% at $ 84.91 on Monday.
A Glimmer of Hope
While the return on oil supplies is already showing an extremely financial level of grief, the OPEC + output deal offers a glimmer of hope as it could provide a bottom for falling prices and could give these producers some breathing room.
Some analysts believe that while short-term production cuts will do little to turn the tide of massive oversupply, prices should have recovered by the end of this year to the mid-1940s.
"It's just too late to avoid building a super-sized inventory of more than a billion barrels between mid-March and late May and prevent spot prices from falling into single digits," wrote Ed Morse, Citi & # 39 ; s global head of raw materials. in a note to customers on Sunday.
Yet large oil companies have endured countless recessions and even survived the 2008 financial crisis.
"Past oil declines, Big Oil on aggregate has not responded to challenging macro conditions due to material dividend cuts," Goldman Sachs analysts said in a recent note, adding that they don't expect a cut due to the current environment.
Exxon Mobil CEO Darren Woods said on Investor Day of the company on March 5 that Exxon is "committed to a reliable and growing dividend". The company has increased the payout every year for the past 37 years.
Chevron CEO Mike Wirth also recently reiterated that the integrated power producer is on track to increase its annual payout per share for the 33rd time in 2020. Both Exxon and Chevron shares have gained more than 10% in the past month.
Bottom Line
No one can say with certainty how the oil markets will behave in the coming weeks and months when there is a large gap between supply and demand. But the fall in production and the end of the Saudi-Russian price war offer some hope that the major US oil companies now have more room to absorb the demand shock from the coronavirus pandemic.
