Chevron’s big earnings miss on Friday, underscored by its worst quarterly profit in 13 years, raised a number of questions about the near-term prospects for Big Oil, and perhaps none more pressing than the sustainability of dividend yields.
Chevron posted net income of 30 cents a share on revenue of $40.36 billion, compared with analyst estimates of per-sharing earnings of $1.16 on $30.91 billion in revenue.
The company maintained its quarterly dividend at $1.07 per share in the second quarter, returning $2 billion to shareholders. Chevron hasn’t raised its dividend since Q2 2014 and kept investors guessing as to whether it would do so later this year.
Asked on the company’s conference call whether Chevron would raise the dividend by the fourth quarter, Chief Financial Officer Patricia Yarrington said, “We don’t want to get out over our skis. We want to do it in a manner and at a time that we can do it in perpetuity…. We’ll do it at a time that the financials allow us to get there.”
Chevron said maintaining a strong dividend was its No. 1 priority and the company was committed to covering the dividend from free cash flow in 2017, and not just at the previously stated oil price of $70.
“We intend to cover the dividend from free cash flow at whatever the ensuing price,” Yarrington said. “That is a firm commitment.”
Chevron Chief Executive John Watson bluntly said the results were “weak,” adding that he was working to slash costs by renegotiating supply contracts. This week, he laid off 2 percent of the company’s staff.
Yarrington said on the conference call that asset sales were not off the table.
But the results raised new questions about shareholder returns at a time when oil prices appear headed for new lows. Just last week, Goldman Sachs advised investors to buy names such as ExxonMobil and Suncor Energy that can increase their dividends, and avoid those that will deliver relatively flat distribution growth, including Chevron and Cenovus Energy.
Raymond James energy analyst Pavel Molchanov on Friday noted that Chevron has halted its stock buyback program, and ExxonMobil has cut buybacks by more than 80 percent since the beginning of the year.
Exxon also posted an earnings miss Friday, reporting its lowest profit in six years. It raised its dividend to 73 cents per share from 69 cents in the first quarter.
“The management teams of these two—and in general oil and gas large-caps more broadly—they view the dividends as sacrosanct. It is inconceivable that either of these guys would cut the dividend based on any change in commodity prices,” he told CNBC’s “Squawk on the Street.”
He noted that in the last decade, BP was the only large-cap oil and gas producer to cut its dividend. That was in response to its role in the Deepwater Horizon oil spill rather than commodity price movements.
However, John Kilduff, founding partner at Again Capital, said energy dividends are currently high, and it is hard to see them holding up.
“If the cash position weakens more, they’re going to have to cut those dividends,” he told CNBC. “As an investor, I wouldn’t count on them going forward.”
Kilduff said integrated firms that have both upstream and downstream operations are better-positioned than independent oil companies to weather the storm, but he noted that refinery margins, one of the bright spots in the energy industry, could soon come under pressure as distillate fuel supplies ratchet up.
Chevron said its earnings from U.S. downstream operations rose about 41 percent to $731 million, due to higher margins on refined product sales.
“They’ve been bailed out to a degree because refining margins have been tremendous,” he said, “But there’s a glut on the horizon for distillate fuels, and diesel fuel in particular.”