Major oil companies have recently raised their guidance for dividend payouts, promising shareholders handsome returns at a time when a growing number of investors are questioning the future of oil and snub energy stocks.
Big Oil and the largest and yet-to-be-listed oil company in the world—Saudi Aramco—have updated their dividend plans in recent months in a sign that they believe they can raise returns to shareholders even if no one is really certain where oil prices will be a month, a quarter, or a year from now.
The biggest oil companies in the world play their trump card—dividends— in the race to attract investors, a race they have been losing in the past couple of years.
Investors have been shunning the energy sector amid heightened volatility in oil and gas prices, sudden price slumps, and concerns about future oil demand.
So far this year, the energy sector has widely underperformed the S&P 500 index. According to Yardeni Research, Inc, the energy sector in the S&P 500 has lost 2.8 percent year to date to October 8, compared with a 15.4-percent increase in the S&P 500 index. Energy was the worst performer among the major sectors in the S&P 500, and the only one to have had negative performance year to date to October 8.
Yet, despite the apparent Wall Street snub, Wall Street sell-side analysts and stocks experts are not convinced that the energy sector is done for good.
Oil majors are now out to boost dividend payouts to keep shareholders happy and, hopefully, to attract more.
ConocoPhillips was the latest oil firm to announce it is raising dividends. On Monday, the U.S. company said that it is bumping up its quarterly dividend by 38 percent, which translates into an annualized increase in the dividend of around US$500 million. Share repurchases for 2020 would be some US$3 billion, down from the US$3.5 billion worth of share buybacks this year.
The US$500-million difference in buybacks this year and next is effectively shifted to dividend payments, a sign that ConocoPhillips is confident it can please shareholders even in the current dire outlooks on oil demand and, consequently, oil prices, for the rest of 2019 and early 2020, Bloomberg Opinion columnist Liam Denning writes.
And it’s not only ConocoPhillips that vows to boost dividends.
In June this year, Shell said it is building a business with the potential to return US$125 billion or more in the form of dividends and share buybacks to shareholders between 2021 and the end of 2025.
In September, France’s Total said it is accelerating dividend growth in the coming years, with a guidance of increasing the dividend by 5 to 6 percent per year, up from the 3 percent per year previously announced. Total expects to raise cash flow by more than US$5 billion by 2025 in a US$60 a barrel oil price environment—or an average increase in cash flow of about US$1 billion a year.
Then there is Saudi Aramco, which these years pumps just below 10 million barrels per day—more than the world’s top four listed oil companies combined.
As it tries to push ahead its much-hyped much-delayed initial public offering (IPO), Aramco said in a presentation at the end of September that it would pay a “base dividend” of US$75 billion in 2020 to shareholders, “at the board’s discretion.”
Trying to lure investors for what they hope will be a US$2-trillion valuation of the company, the Saudis will also implement a ‘dividend prioritization mechanism’ to reward non-government shareholders first. Between 2020 and 2024, if annual dividends are below US$75 billion, “dividends to non-Government shareholders are intended to be prioritised so that they receive their pro-rata share of a $75 Bn equivalent dividend,” Aramco says.
Amid growing calls for meaningful climate actions and an investor community wary of betting on Big Oil in a world of energy transition, Aramco and all the other major oil companies are now playing the ultimate trump card—handsome shareholder returns.