Goldman Sachs looks to downturns of the past for reassurance that the likes of Shell and BP can and will retain dividend payments as coronavirus and collapsed crude prices crunch the oil industry.
The American bank’s analyst, in a note, highlighted that on aggregate ‘Big Oil’ doesn’t cut dividends in tough times and economic downturns – specifically, they point out the Shell, ExxonMobil, Chevron and Total have not cut shareholder pay-outs in 30 years.
BP only had to tend its dividends as it responded to the Gulf of Mexico oil spill back in 2010, Goldman noted.
The cohort of the world’s largest stock market listed oilers rode out four major downturns - 1997-2000, 2001-03, 2008-10, and 2014-16 – the bank added.
“We expect this to be the case in the current downturn as well, with improved balance sheet resilience and strong capital discipline further supporting cash ﬂow generation and dividend preservation,” Goldman analyst Michele Della Vigna said.
Reviewing the volatile recent equity price action, Della Vigna noted a 38% bounce-back for the ‘Big Oil’ group, despite underlying crude prices falling a further 11% in the same period.
“This dichotomy is consistent with past downturns and we believe the bounce is justiﬁed by enhanced resilience and free cash flow ﬂexibility … but unlikely to continue without an improvement in the physical oil market, which we do not see on the immediate horizon,” the analyst said.
She added: “In major oil price corrections, ‘Big Oil’ shares tend to fall in line with the oil price for the ﬁrst half of the move, but then recover and stabilise.
“This is because equities tend to be anticipatory assets with a ﬂexible cost structure, while oil prices are physical assets with expensive storage”
“Big Oils will remain free cash flow positive (post-capex, pre-div) even at the trough of the cycle on our estimates, another key difference from previous downcycles, due to stronger and earlier capex discipline.”
BP is Goldman Sachs ‘top pick’, Shells cash returns hailed
In an update on Wednesday BP communicated cost cutting (25% off capex and US$2.5bn off opex), some US$1bn of impairments for the first quarter, whilst boasting a US$32bn cash reserve.
BP noted “no significant operational impact” in the first quarter, but, said this could change through the second quarter.
It said it saw a significant negative impact in fuel demand and the huge reduction in economic activity, and, highlighted specifically that the downstream division had seen “significant and growing decline” in demand, particularly for jet fuel and lubricants.
Meanwhile, according to Goldman, BP is the ‘top pick’ in the sector.
“We believe BP is on the cusp of delivering one of the industry’s strongest pipelines n of new oil and gas projects, while revitalizing its GoM and North Sea legacy, and is ideally positioned … through its highly complex Midwest US reﬁning network.
“The company offers one of the highest FCF and dividend yields at c.10% and 9.8% respectively for 2020E.”
Whilst BP is Goldman’s top pick, it is also notable positive about Shell which is described as having “one of the strongest cash returns to shareholders” – presuming no cuts it would have a yield of about 10%, the American bank noted.
Summing up, Della Vigna said: “Big Oils have consistently reduced costs, improved efﬁciency and maintained strong capital discipline since the previous oil price downturn, creating a more resilient business model.
“On our estimates, the Brent oil price required to cover capex and dividend commitments (breakeven oil price) on aggregate has fallen 30%-60% since 2014, particularly for the European majors, which currently have on aggregate a Brent oil breakeven price of US$44/bl for 2020E.
“Looking ahead, we expect this downward trend to continue, further supported by the recently announced capex cuts.”