The more money a company earns, the more it is able to pay dividends to its shareholders. This classic market economy principle is being challenged by the world’s largest oil tankers. According to a study by the Institute for Energy Economics and Financial Analysis (IEEFA), five of the world’s largest oil companies pay out more dividends than they earn in cash.
The study, entitled "Living beyond their means", shows that between 2010 and 2018, ExxonMobil, BP, Chevron, Total and Shell paid a total of $536 billion in dividends to their shareholders. Yet over that same period, all five companies generated only $329 billion in free cash flow. To close this $207 billion gap, these five oil majors chose to either go into debt or sell assets.
The study by the IEEFA is a reflection of the fossil fuel sector’s gradual decline. Once a major industry driving the world economy, these oil majors have displayed consistently poor performance. According to Bloomberg, the energy sector’s share of the S&P 500 fell below 4% in late January. This is quite a fall down the U.S. flagship index, which has seemed unavoidable since 2009-2010.
A sector under pressure
Investors fear a loss in the value of oil companies’ assets due to market developments. An increasing number of countries are making commitments to reduce their carbon footprints and are pushing sectors, such as the automotive sector, to move away from fossil fuels. Thus, the economic model of these companies has been greatly damaged, and the risk of having stranded assets in their portfolios is becoming increasingly strong. Several oil companies have even had to write down significant assets in recent years.
The only way that oil majors can continue to attract investors is to pay them generous dividends, even if they do not correlate with the real economic performance of the company. Therefore, dividend payments serve as nothing more than a bandage for a "sector in disarray", according to Tom Sanzillo, co-author of the study and director for finance for the IEEFA.
"The oil majors are constantly underperforming the market and they seem to think that shareholders will not notice it until they pay generous dividends", said Sanzillo. Even the rise in the price of a barrel is not enough to restore the balance. According to the IEEFA, increased prices in 2013 and 2014 simply pushed oil companies to further increase their dividend distribution during those years.
ExxonMobil has the largest gap between dividend payouts and free cash flow, which now sits at $64.5 billion. It is also one of the least engaged companies in the energy transition, and has even faced a lawsuit for lying to investors about the reality of climate change. Dividends paid out by the American oil major have grown steadily for the past 37 years, and the gap is expected to widen. This year, ExxonMobil plans to further increase payments to shareholders, despite poor performance. The company is expected to cover 64% of dividend payouts for 2019 with debt or asset sales, compared to an average of 30% since 2010.