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Ever since the Shale region became an important contributor to
US oil production and employer in 2010, it has only had a couple of
years of uninterrupted success, that is until the last major oil
price collapse in late 2014. Shale players have since then lurched
from one crisis to another, all the while adding more and more debt
hoping to recapture the success of 2010-2014 but to no avail. The
emerging picture is one of companies, big and small, with too much
debt and too few opportunities to balance the books, making the
pandemic merely the last straw rather than a catalyst that led to
the recent wave of bankruptcies.
These companies, like their peers in the world, have experienced
an overall decline in output, demand and oil price caused by the
disruption of global market conditions, in many instances having to
revise or even suspend their annual guidance.
<span/>We examine the main
dividend players in the Shale region and how their dividend
sustainability is affected by potential annual payout, debt,
reserve-based lending and change in productivity amidst the current
unprecedented times. The table below demonstrates the lowest to
highest expected dividend payers for the Shale region for FY'20. It
is important to note that names such as Canadian Natural
Resources (CNQ) and ConocoPhillips (COP),
although among companies with the highest expected payout for the
year, are still at risk for a cut in their upcoming quarter.
Borrow to Drill
Since the last financial crisis, the Fed's longstanding
quantitative easing program made debt much cheaper and more
accessible to a lot of companies in the Shale region. Most of these
companies opted to issue debt in the case of blue chips, signed up
for revolvers or reserved-based lending for mid- and small-cap
names. Ordinarily this practice is well and good when demand and
supply of oil are balanced, the price of oil is higher than their
breakeven prices and they can service their debt with no issues but
that is not the case and arguably hasn't been so since 2015.
More than 230 North American oil and gas producers owing at
least $152 billion in debt have filed for bankruptcy since 2015. In
the second quarter of 2020, the companies that went bankrupt
totaled a whopping $29 billion in debt outstanding.
Even for blue chip companies such as Exxon Mobil
(XOM) the debt feels like a noose around its neck,
potentially threatening the company's survival. XOM represents the
highest debt increase year-over-year of the companies we analyzed,
with the company being expected to increase its total debt by
$22.19 billion, or approximately 48%. Exxon has previously
mentioned that about 70% of its shareholders look to the company's
dividend as an important source of income, but the company's
actions in the debt markets could potentially jeopardize the
vaunted position of the dividend. Credit ratings in both Moody's
and S&P show a negative outlook and has had its rating
downgraded already in 2020.
Year-over- year debt increases of $1.07 billion, or 15%, for
Hess Corporation (HES) with total debt as a % of
Equity increasing from 79.2% in 2019 to 115% in 2020. Hess has a
stable liquidity position, with only one near term debt maturity
that comes from a three-year loan agreement with JPMorgan for $1
billion. Although its debt position does not cause a problem for
the company, earnings and free cash flow are projected to be
negative for the upcoming two years, potentially impacting funds
available for dividends.
Regarding Parsley Energy (PE), total debt
increases by 27% year-over-year, and as a response to the Covid-19
pandemic, the company entered into an amendment to its revolving
credit facility which reaffirmed its borrowing base at $2.7
billion, increasing the committed amount to $1.075 billion and
extending the maturity date to October 28, 2023. With a stable
liquidity position and long-term debt due solely in 2025, PE finds
itself in a strong position to maintain the dividend, with the
possibility of increasing it by 2021, along with the diminished
risk of debt default due to an extended period of raised
capital.
Geopolitical Risk
Going back to the oil downturn of 2014, many oil companies had
cut costs in response to the event, when OPEC opened wide oil taps
to try to protect members' market shares in reaction to the US
Shale revolution. Nowadays, with the oil price benchmark showing
decreases since the start of the pandemic, many companies revised
their plans of return promises to investors, either by slowing down
share buy backs or reintroducing non-cash dividends.
The Russia-Saudi Arabia oil price war that initiated in March
2020 also complicated the global oil stability. Due to Russia's
refusal to reduce oil production in order to keep prices for oil at
moderate levels, a steep drop of oil price happened over the spring
of 2020.The graph below shows the oil price dropping to the
mid-teens in April while at the same time, our internal drop
probability scores went up. For example, XOM's probability of a
dividend cut went from less than 10% in February to almost 60% in
March-April period when the toll of the price war and the steep
decline in demand were hitting oil and gas companies.
Going forward, in response to the fall in oil price, multiple
Shale oil producers that require oil prices above a $40 per barrel
to sustain operations were forced to cut production, especially
given the fact that most of them expected a barrel price of $55-65
in 2020. As a result of the oil price crash, several companies with
Shale presence declared bankruptcy, such as Whiting
Petroleum and Chesapeake, for example.
What investors can expect is that if oil prices are not stabilized
and OPEC members continue engaging in price wars and dictating the
global price of oil with production curtailments or increases, it
won't be long until we see a lot of the oil companies' financial
position being affected and consequently, their ability to pay
dividends.
Contacts:
Amira Abdulkadir, Product Analysis & Design Director
Kelvin Menezes, Research Analyst
Email: dividendsupport@ihsmarkit.com
To access the report, please contact
dividendsamer@ihsmarkit.com
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