Crude prices hitting their lowest levels since the 2008-09 financial crisis has revived investor fears that dividends could be shelved or cut, with one company already taking the plunge.
Meanwhile, Kinder Morgan Inc. slashed its dividend 75 percent, marking the first time the U.S. pipeline giant has cut payouts to shareholders since it has been a publicly traded company, Reuters
The suggestion is that “Big Oil” could follow the path of the mining industry, which is dealing with the worst commodities downturn in a decade, the Financial Times
Even as miner Anglo American announced on Tuesday that it would withhold payouts for the next 18 months, dividend yields for some energy stocks soared.
“In London, the yield on Royal Dutch Shell shares topped 8 percent, rising to within touching distance of historic highs set during market turmoil in August. BP’s dividend yield jumped to 7.7 percent. Such sharp moves in dividend yield, which measures the payout as a percentage of the share price, reflect the extra returns demanded by investors to hold the shares,” the FT reported.
“Share prices for the big U.S. oil companies, which are seen by analysts as having a lower risk of cutting their dividends, have also been falling in recent days, driving their yields higher,” the FT reported.
“The question is whether investors’ fears over payouts are justified. Prices have collapsed since the summer of 2014, the result of booming US shale production, weaker-than-expected Chinese demand, and OPEC’s decision to abandon its traditional role as the stabilizing force in the market,” the FT reported.
To be sure, the head of the International Energy Agency expects oil prices to remain low next year as demand weakens and supply remains high.
Fatih Birol, executive director of the IEA, which represents oil-consuming nations, told a news conference on the sidelines of the U.N. climate conference in Paris: "When we look at 2016, I see very few reasons why we can see growth in the prices."
He warned, however, that investment in production is due to drop for a second consecutive year for the first time in 30 years. He noted that could cause "surprises" in supply in the future, the Associated Press
reported. The U.S. benchmark recovered 1.6 percent at $38.08 on Wednesday.
Kinder Morgan's move, which will reduce the annual dividend to 50 cents a share from about $2 a share, is an acknowledgement that the worst oil price crash in six years is hurting once-resilient pipeline companies.
Once the darlings of investors, growth prospects of pipeline companies have been undercut by a 50 percent slide in oil prices and tough environmental reviews that have delayed projects.
Pipeline companies have been especially popular with investors in recent years for their ability consistently to pay and grow large dividends. But their attractiveness has faded since at least the summer as executives at some of the biggest pipeline companies, including Plains All American LP, have warned of slower or variable dividend growth.
Investors say they are skittish over the prospect of rising U.S. interest rates, a dimmer outlook for additional new volumes of oil and natural gas flowing onto new midstream systems, as well as the potential for lower shipments and fees on existing lines.
Kinder Morgan shares have shed about half their value since the company first warned on Oct. 21 that payouts would slow. In after hours trade on Tuesday the shares fell nearly 7 percent to $14.67.
Moody's put the company on credit watch negative last week after it bought a stake in a leveraged natural gas pipeline system, and several analysts downgraded the stock.
Founder Rich Kinder said the smaller payout to investors would allow Kinder Morgan to avoid issuing equity while maintaining its investment grade credit rating.
"We evaluated numerous options, including significant asset sales, but ultimately concluded that these other options were uneconomic to our investors in the long run. This decision was not made lightly," he said in a statement.
Analysts at Tudor Pickering Holt told clients in a note that the cash would be better spent reinvesting or buying back shares.
"We'd argue that while market clearly hates the possibility of a dividend cut, a full payout is the least effective use for that cash."
(Newsmax wire services contributed to this report).
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