Oil Investors See $7.4 Billion Vanish as Dividends Targeted

The check is not in the mail.

Bludgeoned by falling energy prices, at least a dozen oil and natural gas companies have opted to cut dividends this year to preserve cash, cannibalizing payouts considered sacrosanct by many investors.

The cost to shareholders: more than $7.4 billion in lost income, compared to what they would have received this year if the payouts remained the same.

It’s another painful measure -- along with tens of thousands of layoffs and more than $100 billion in canceled investments -- of the toll taken on the industry by the worst oil and gas price slump in decades. The quarterly Payments Payments One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonl One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonl Read this Term, prized by conservative shareholders as a source of steady income, are unlikely to be restored any time soon.

“It really reinforces the necessity of having a margin of safety if you are buying a stock primarily for its dividend," said Josh Peters, editor of Morningstar Inc.’s DividendInvestor newsletter. “What we have found for some of the energy companies is that the margin of safety was either slim or nonexistent."

Kinder Morgan Inc.’s 75 percent dividend cut was the biggest, amounting to a $3.44 billion loss for shareholders over the course of 2016. The announcement from North America’s largest pipeline operator “came as a shock to some people and obviously was deplored by some people," founder and Executive Chairman Richard Kinder told analysts at a Jan. 27 meeting.

The move was necessary to help the Houston-based company keep its investment-grade credit rating while ensuring it has enough money to pay debts and grow, Kinder said. Since the Dec. 8 announcement, shares have risen about 20 percent, compared with a 5.3 percent gain for the Alerian MLP stock index, which tracks energy infrastructure companies.

“This is a direct result of investors’ appreciation of the significant efforts we’ve made to live within cash flow and strengthen our balance sheet," spokesman Dave Conover said in an e-mail.

Dividend-slashers including ConocoPhillips ($2.42 billion in annualized cuts) and Anadarko Petroleum Corp. ($447 million) made similar arguments. They followed the lead of Marathon Oil Corp., Eni SpA, Chesapeake Energy Corp. and Transocean Ltd., who cut payouts in 2015 as the industry girded for what’s expected to be a multiyear slump.

Along with a dividend cut, ConocoPhillips also canceled plans to boost production and said it expects to write down the value of some fields by $800 million. “We believe it’s prudent to plan for lower prices for a longer period," Chief Executive Officer Ryan Lance said in a Feb. 4 statement.

European Payouts

In Europe, the downturn forced Repsol SA, Spain’s biggest oil company, to reduce payouts for the first time in seven years after reporting a net loss in the fourth quarter. Norway’s Statoil ASA kept its payout but proposed a scrip dividend last month, allowing shareholders to take their payment in shares instead of cash.

In Canada, Husky Energy Inc., Crescent Point Energy Corp. and Cenovus Energy Inc. also cut dividends. Husky eliminated its longstanding cash dividend last year, canceling what would have been $1.2 billion in payments for 2016.

“The board will continue to review the dividend on a quarterly basis with the objective of restoring a sustainable dividend,” Kim Guttormson, a spokeswoman for Husky, said in an e-mail.

Also paring dividends this year: U.S. drillers Cimarex Energy Co., Devon Energy Corp., Noble Energy Inc. and Range Resources Corp. and U.K. oil-services provider Amec Foster Wheeler Plc.

Bloomberg News calculated the cost to shareholders based on the number of periods companies will pay at the lower dividend rate in 2016, assuming no further changes. Repsol has only declared one payment so far this year.

Tough Decision

For smaller or newer drillers like a Cimarex or Range Resources, which each halved their dividend, the decision was probably easier, said Brian Youngberg, an Edward Jones & Co. analyst in St. Louis. With better growth prospects for their shares, the quarterly payout was never a big selling point for the stocks, he said.

For more well-established companies, like ConocoPhillips, it’s a more painful choice, he said.

“The Exxons and Chevrons, they’re so big, it’s hard for them to call themselves a growth story," Youngberg said by telephone. “They are income stocks, and these guys know why their investors own the shares."

Chevron Corp. told analysts on March 8 that it would slash spending on new projects by 26 percent in the next two years and consider more borrowing to defend its $1.07 a share payout.

“We have a shareholder base that values current income,” Chairman and CEO John Watson told reporters after the company’s annual strategy presentation in New York. “That’s been our traditional shareholder base. They value continuity.”

Oil is down more than 60 percent from a June 2014 peak and traded at $39.88 a barrel at 1:47 p.m. Thursday on the New York Mercantile Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term. Natural gas is down 33 percent in the past year to $1.914 per million British thermal units.

Even if prices rebound, companies will be wary about restoring dividends, said Morningstar’s Peters. Their priorities will probably continue to be paying down debt and building up cash reserves to avoid another financial crisis, he said by telephone.

“It could be a lot of years before you see any meaningful rebound in the dividend," he said. “It’s tough to have a really conservative, stable investment in a business that can’t control the price of its own product."

--With assistance from Joe Carroll Meenal Vamburkar Rakteem Katakey and Rebecca Penty To contact the reporters on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net, Michael Roschnotti in New York at mroschnotti1@bloomberg.net. To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Susan Warren, Reg Gale

By: Alex Nussbaum and Michael Roschnotti

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