International Oil companies could soon suspend payment of dividends to shareholders and cut back production as a virus-induced low oil demand, complicated by a price war among top producers sent oil prices to their lowest levels in two decades, analysts say.
Already up to 10 million barrels a day of world oil production will be cut or shut-in from April to June 2020 as oil storage fills up and output from financially strapped companies begins to fall, analysts at HIS Markit, a London-based energy intelligence firm.
“If there is no international agreement to curtail oil production then brutal unadulterated market forces will bring the oil market into balance. The laws of supply and demand are fierce in extreme conditions.” – Jim Burkhard, vice president and head of oil markets, IHS Markit.
Donald Trump, president of the United States has said the U.S. would meet with Saudi Arabia and Russia to halt an historic plunge in oil prices that is ruining economies of oil dependent countries like Nigeria.
Despite the president’s remarks, neither nation has backed down from their price war, and Iraq is now suiting up to join the war saying it would ramp production by 200,000 barrels a day in April.
It is only logical that if oil cannot be sold or stored, it cannot be produced. Transportation constraints and lack of access to every available tank will prevent the utmost maximum level of storage capacity being reached.
Oil demand in the second quarter of 2020 is projected to be 16.4 MMb/d less than a year ago, with a decline in April of around 20 MMb/d. Demand is collapsing because of the closure of a large share of the global economy because of coronavirus disease 2019 (COVID-19).
IOCs have begun to pull the various levers at their disposal to conserve cash flow and protect their dividend pay-outs, says Energy Intelligence, another oil sector intelligence provider.
But if the twin events of the coronavirus pandemic and the Saudi-Russia standoff continue for several more months, as seems likely, then, whether they want to or not, the majors will have to consider cutting back on the cash payments they currently distribute to their shareholders, the firm said.
Oil majors including Royal Dutch Shell, Chevron and Eni have announced a series of measures that include slashing capital spending, trimming of operating expenses and the cutting back or suspension of share buyback schemes.
However, none of them thus far has dared to suggest a cut to dividends — which are seen as sacrosanct by many oil executives. This may change if the situation persists, analysts say.
“Working capital release and capex reductions mean dividends can be maintained initially but with a growing risk of cuts the longer the current environment is perceived to last, or worsens,” said London-based investment bank Panmure Gordon.
One important factor that might save the majors from cutting their dividends, according to Rystad Energy analyst Espen Erlingsen, is that their cash-flow situation “is much stronger now than it was during the last downturn in 2015 and 2016.”
This means that, even with oil in the $30s, some companies can generate cash flow. So, reducing investments and delaying maintenance programs on producing fields might be enough to help them through the downturn. However, Erlingsen added, “if the low oil price continues, we expect that dividend payments will also be at risk.”
Meanwhile, another key lever some majors can pull is cutting back on their tight oil spend. Exxon Mobil, Chevron, Shell, and BP have significant acreage in the US Permian Basin where they had previously been spending large amounts on tight oil.
But — along with many independent US shale players which have announced cuts to their spending in the Permian by as much as 50% — the US majors have said that they have already begun to curb their activities there according to analysts at Energy Intelligence.