Big Income in the Oil Patch

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The big oil companies have historically paid the biggest dividends among blue-chip companies. Nothing has changed.
Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) pay dividends that yield in excess of 4%. BP Plc (NYSE: BP) and Royal Dutch Shell (NYSE: RDS.a) pay dividends that yield in excess of 5%.
What’s more, the big oil companies have sustained their high-yield dividends.
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Unlike their smaller brethren, Exxon Mobil et al. maintained dividends when oil prices plunged below $30/barrel in late 2015. Many formerly high-yield master limited partnerships (MLPs) were less fortunate. Distributions were slashed, unit prices were decimated.
This isn’t to say the going was easy. Exxon Mobil was the only one of the four majors to sustain annual dividend growth. The other three were forced into dividend-growth hibernation.
The good news is that rising oil prices are loosening the purse strings.
Chevron returned to meaningful dividend growth this year. BP and Royal Dutch Shell are sufficient flush to emerge from hibernation. In the meantime, BP and Royal Dutch Shell pay dividends that yield a full point more than Exxon Mobil and Chevron.
Why the optimism? All signs point to rising oil prices and rising energy-company fortunes.
Demand remains robust. The International Energy Agency (IEA) says that daily world demand grew by 1.65 million barrels in March. That’s a 30,000 daily increase over February. China leads the demand parade. China’s crude imports in March rose more than 21% from the previous month.
Demand is on the rise. Supply isn’t.
High prices are the cure for high prices. The same is true for low prices. When prices are low – too low to earn a profit – producers pick up the ball and head home. As the familiar adage goes, when you find yourself in a hole, stop digging. Many oil producers stopped digging in 2015.
The big boys didn’t stop digging, but they exerted less effort. After West Texas Intermediate plunged below $30/barrel, Exxon Mobil cut its capital-expenditure budget 25%. Chevron, BP, and Shell implemented similar cuts.
Capital expenditure in global oil production fell to $200 billion in 2016 from an all-time high of around $520 billion in 2014, according to consultancy firm McKinsey.
New investment is on the rise. DNV, a technical adviser to energy, reported that 66% of the senior oil and gas professionals surveyed said their company would maintain or increase capital spending this year. The percentage was 39% last year.
Supply will remain tight despite the increased spending. Producers have increased CAPEX spending and operating budgets, but not to levels before oil price tanked.  Oil services giant Schlumberger (NYSE: SLB) warns that the world faces oil-supply challenges. The challenges are unlikely to be surmounted in the near future.
Venezuela, an OPEC member, is in a freefall on oil production, social cohesiveness, and political stability. Mexico’s nationalized, monopolized PEMEX continually under-produces and-under invests. Angola, China, Malaysia, and Indonesia remain cautious in increasing production. If the U.S. federal government fails to extend a waiver on Iran sanctions, supply will fall further still.
This leaves Saudi Arabia, the United Arab Emirates, and the United States as the only feasible sources of immediate supply.
One prominent hedge-fund manager claims that current reluctance to invest will drive oil prices far above $70/barrel. He says that $300/barrel oil is “not impossible” within a few years.
The hedge fund manager’s outlook is audacious and likely wrong. But the future likely holds rising oil prices. That’s good news for oil producers.
Oil companies returned to profitability in 2017. Better yet, with oil prices exceeding $60/barrel, margins are expected to increase in 2018. The big oil companies should see $24.5 billion in incremental cash flow, according to RBN Energy, an industry data provider.
Higher oil prices have lifted the operating cash flow for the four big oil companies mentioned here. Higher oil prices will lift cash flow even higher. Higher operating cash flow leads to higher dividend cash flow.
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