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Oil Price Crash Threatens Shell and BP’s Dividends

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Should BP and Shell conserve cash or pay out dividends to please shareholders? Bidness Etc discusses the dilemma being faced by the oil giants amid plummeting crude oil price

Published: Jan 9, 2015 at 6:57 am EST

In recent months, questions have been raised if it is prudent for companies to pay out dividends or build up cash reserves. With crude oil falling below the $50 per barrel barrier, many energy firms have had to cut their capital expenditures (capex), halt expansion plans, get more debt, and sell off assets.

Sacrificing revenue growth and selling off valuable assets is not a sustainable way to balance cash flows, but should the companies continue to pay billions of dollars in dividends? Perhaps, it would be wiser to withhold dividend payments to protect the company from negative impacts of falling cash flows.

Bidness Etc looks at two oil companies who have a strong and longstanding history of regular dividend payments. BP plc (ADR) (NYSE:BP) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) are expected to pay out billions of dollars in dividends for 2014. The official dividend announcement for Shell and BP for the fourth quarter of fiscal year 2014 will be made on January 29 and February 3, respectively. Analysts estimate Shell to pay $6.9 billion and BP to pay $6.71 billion for the fourth quarter, taking the dividends’ total to $13.6 billion.

According to a recent research conducted by Citigroup Inc (NYSE:C), Shell’s estimated capex and dividend payments for 2014 are 100% of its cash flow for the year. As per the company’s current plans, the capex and dividends for 2015 would be nearly 130% of its operating cash flow for the year. This is an alarming statistic for the company. It implies that 30% of the company’s capex and dividends will have to be financed through debt or asset disposals. This poses a significant threat for the company as borrowing will make the oil giant highly leveraged.

According to the previously mentioned research from Citigroup Equity Research division, BP’s capex and dividend payments for 2014 are 102% of its cash flow for the year. The figure is estimated to rise to 124% for 2015. BP would have to finance 24% of its capex and dividends through debt or asset disposals.

Raising capital through debt markets has its own risks, which can be offset by investing in growth. Raising debt to pay off dividends makes little sense from a financial and economic perspective. It does not serve the purpose of maximizing shareholder wealth – the holy grail of management objectives. Meanwhile, asset disposals can become a challenge and hinder future growth potential of the company.

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