Big Oil seeks to attract investors with massive dividends

Big Oil has just had another successful season, posting the second straight quarter of stellar growth of highs and lows. According to the latest FactSet data, the energy sector’s second-quarter 2021 revenue growth rate of 24.9% is well above Wall Street’s estimate of 19.4%, while the industry said A profit of $ 15.9 billion versus a loss of – $ 10.6 billion in the second quarter of 2020 marked the biggest Y / Y improvement of any of the S&P 500of the 11 market sectors.

Interestingly, the Big Oil duo of ExxonMobil (NYSE: XOM) and Chevron Corp. (NYSE: CVX) were largely to be thanked for the exceptional performance, the two combining for $ 13.9 billion of the industry’s $ 26.8 billion year-over-year profit increase.

Unsurprisingly, the majority of the oil and gas majors have used their cash to reward shareholders with higher dividends and buybacks.

Chevron, Marathon Oil (NYSE: MRO), Equinor ASA (NYSE: EQNR), and Royal Dutch Shell (NYSE: RDS.A) announced dividend hikes in its latest earnings call as ConocoPhillips (NYSE: COP) and BP Plc (NYSE: BP) reinstated share buybacks after windfall profits.

But contrary to Wall Street’s expectations, Big Oil’s cash bonus, including big dividends, has mostly failed to impress investors, a rather surprising development in a market lacking in returns.

There is a method to the madness, however.

Kathy Hipple, a finance professor at Bard College in New York, told CNBC that Big Oil’s offer to lure investors with cash rewards is unlikely to work on long-term investors.

Dividend traps

Companies in all industries normally use dividends and share buybacks to make their stocks more attractive to investors.

For most companies, dividend payments serve as a symbolic reward to shareholders for their investment. However, oil companies are uniquely adept at handing out these token rewards, and Big Oil has some of the most impressive returns in the business.

ExxonMobil currently posts a dividend yield of 6.60% (Fwd); Chevron reports 5.68%, BP 5.56%, Shell 5.01%, while MPLX LP (NYSE: MPLX) registers with a yield of 10.01%.

Meanwhile, stock buybacks are designed to increase a company’s profits, which is ultimately reflected in its share price.

However, Hipple says that while a 10% return can act as a strong magnet for the middle-income investor, savvy long-term investors do not fall for the trap because they view oil and gas companies as traps. dividends with an expiration date that is getting closer day by day.

“Once institutional investors determine that demand has peaked – which has likely already happened – they will exit the industry for good. Many have already done so, based on the market performance of the sector over the past few years.. “

Stranded Assets

Hipple said savvy long-term investors will continue to shy away from large oil and gas companies “unless and until” they fully recognize the climate crisis because of the very real risk of stranded assets.

These investors understand that the oil majors are still investing tens of billions in unnecessary oil and gas infrastructure, ignoring the IEA findings that no additional infrastructure is possible to meet a 1.5 [degrees Celsius] scenario. These investments are likely to become stranded assets, and investors don’t want to be left with the bag. “

She certainly has a valid point here.

Last week, the Intergovernmental Panel on Climate Change issued its strongest warning yet about the worsening climate emergency, claiming that a key temperature limit of 1.5 degrees Celsius could be outdated in just over a decade without immediate, rapid and large-scale reductions. in greenhouse gas emissions.

UN Secretary-General António Guterres called the report’s findings a “code red for humanity”, saying they “must sound the death knell“for fossil fuels.

To be sure, America’s shale companies exercise much more capital discipline than in the past. Shale drillers are used to matching their capital expenditures to the strength of oil and gas prices; However, Big Oil is dropping the old playbook this time around. Rystad Energy says that while tight tank oil producers‘ hydrocarbon sales, operating cash flow and EBITDA are all likely to test new records if WTI averages at least $ 60 on a barrel this year, capital spending will only see moderate growth as many producers remain committed to maintaining operational discipline.

However, the lion’s share of these investments still goes towards developing new oil and gas assets, with a tiny fraction going towards sustainable energy.

Hipple isn’t the only one with a grim view of old oil and gas companies.

Frankly, we don’t think these are very good companies. With the oil companies, we still don’t think they are good long-term businesses. They do not generate consistent returns on capital or cash flow, although by the time they appear to be in a fairly good position,David Moss, head of European equities at BMO Global Asset Management, told CNBC.

Moss, in particular, blames European energy majors who are currently generating “very strong” cash flow amid a sustained rebound in oil prices, but many are choosing to limit their spending rather than invest in sustainable energy.

It looks like Wall Street is now doing a 180 and more and more bearish on Oil and Gas.

In a recent report, Standard Chartered claims that Wall Street is dead wrong in its expectations of high oil prices because “…a significant amount of money has already entered the market in the belief generated by Wall Street (error according to our analysis) that the balances are much tighter and justify 80-100 USD / bbl. “

By Alex Kimani for Oil Octobers

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