(FROM THE WALL STREET JOURNAL 2/5/16) 
   By Sarah Kent and Bradley Olson 

The world's biggest energy companies have a tough decision to make amid languishing oil prices: Do they keep their coveted investment-grade credit ratings or maintain century-old practices of paying shareholders annual dividends worth billions in cash?

Exxon Mobil Corp. and its peers are grappling with the collision course between the two, which appears unavoidable as crude continues to hover around $30 a barrel. Even with announced spending cuts that exceed $92 billion, producers are losing money on almost every barrel they take out of the ground. Paying dividends makes their cash shortfall even worse.

Four of the biggest Western oil companies -- Exxon, Royal Dutch Shell PLC, Chevron Corp. and BP PLC -- are poised to pay more than $35 billion in dividends to investors this year, an amount equal to about 40% of their combined cash flows, says Oppenheimer & Co. To do so, they face increased pressure to borrow, a strategy that has alarmed ratings firms.

"The question is, how bad are things going to get in 2016?" said Simon Redmond, director of oil and gas corporate ratings at Standard & Poor's Ratings Services. "For a company to focus on continued cash distribution is not credit positive."

Since the start of the year, all three of the world's top ratings firms have warned that oil company credit standings are at risk. S&P has already downgraded Shell and Chevron to mid-tier investment grade ratings, and raised the prospect that Exxon -- whose AAA rating outlasted even the U.S. Treasury's -- could face a one-step downgrade from its top-tier status.

So far, the chief executives at the biggest publicly traded energy companies have chosen dividends over higher debt ratings. But many smaller rivals, including ConocoPhillips, have slashed their hefty payouts. Conoco last year told investors its dividend was sacrosanct, but on Thursday cut its first quarter payment by 66% to 25 cents a share as it reported a $3.5 billion loss for its fourth quarter. Conoco shares fell nearly 9% to $35.32 in 4 p.m. New York trading.

Shell, which posted a $1.8 billion fourth-quarter profit, off 60% from a year earlier, reiterated plans to keep paying its dividend this year, helping boost its shares.

Nowhere is the tension more pronounced at the largest oil companies than at Exxon, which has increased its dividend for 33 straight years and made the payouts for more than a century. The company's bond rating has endured for decades through a number of commodities price crashes, the Valdez oil spill in Alaska's Prince William Sound and even megamergers with Mobil and XTO Energy.

Exxon is better managed than most countries, said Joe D'Angelo, an energy consultant at investment bank Carl Marks Advisory Group LLC. "For them to have lived through so many hurdles and now this one trips them, you have to stop and think about it," he said.

A ratings downgrade isn't the worst thing for most integrated oil companies because they are unlikely to lose access to capital markets or see their financing costs soar. This week Bob Dudley, BP's chief executive, said a ratings cut wouldn't have a significant impact on his company.

But ratings cuts would represent a loss of prestige, a sign that the ability of these companies to dominate world markets has diminished with this latest downturn.

"We get value from the AAA credit rating in our business, whether it be access to financial markets or access to resources," Jeff Woodbury, an Exxon vice president, said this week. "There is a benefit that we get from it, and we see it as being important."

Many oil and gas executives paying high dividends this year have pledged repeatedly not to cut the payouts in virtually any circumstance. One early outlier: Italy's Eni SpA cut the dividend in March and its shares fell 7% on the news. Since then Eni's stock has declined less than Chevron, BP and Shell.

Dividends put a strain on big oil companies because they are trying to spend only as much cash as they take in from their operations. Even if they manage to achieve that, they have to come up with more for dividends. "It's a terrible market to be trying to sell most assets out there," John Watson, Chevron's CEO, said last week. But he added that maintaining and even growing the dividend remains Chevron's "number one financial priority."

Such promises are essential to luring investors in the face of the worst oil crash in decades. For millions of retirees, who buy stock directly or through investment funds, dividends are a key source of income. Some could see a cut as a betrayal, analysts said.

"To a lot of generalist investors, there's a view that an investment in Exxon or Chevron is safe," said Norman MacDonald, a portfolio manager at fund manager Invesco Ltd. The companies are "painted into a corner," he said. Directors should reconsider their dividend policies, said Fadel Gheit, an analyst at Oppenheimer & Co. who has called for oil firms to reduce the payouts.

 

(END) Dow Jones Newswires

February 05, 2016 02:48 ET (07:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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