What happens to big oil dividends if oil prices stay low?

I get asked ques­tions all the time. I thought I’d share some (along with my answers) that might be of gen­er­al inter­est start­ing with this post.

On the top­ic of div­i­dends: what is your take on Big Oil going into the red to con­tin­ue to deliv­er div­i­dends? It seems like a risky bet in the face of what may be per­sis­tent­ly low­er oil prices.

I actu­al­ly talk about exact­ly this in my book. Not specif­i­cal­ly about big oil, but about how com­pa­nies can pay div­i­dends even when there are no “prof­its”. The thing is, prof­its are an account­ing arti­fact, and not a real state­ment as to an abil­i­ty to pay div­i­dends. A com­pa­ny can very eas­i­ly pay div­i­dends with­out prof­it as long as they have the cash flow to do so.

That said, think­ing that big oil busi­ness is as sim­ple as “they make mon­ey when oil prices are high, and lose it (make less?) when they’re low” is sil­ly. Business is com­plex. As much as we’d like to sim­pli­fy it to under­stand it bet­ter, that only gets us so far.

I also like to look at incen­tives. Specifically, exec­u­tive incen­tives and how they align to what I want (con­sis­tent­ly increas­ing div­i­dends). Executives are often moti­vat­ed by share price, and mess­ing with the div­i­dend is a good way to tank a stock — so div­i­dend investors are aligned to the per­son­al moti­va­tions of the CEO. (Now I’ve fall­en into the trap of ‘over-sim­pli­fy­ing some­thing to make a point’… see how easy that is to do?)

Importantly, com­pa­nies that val­ue the div­i­dend and their abil­i­ty to increase it don’t behave in align­ment to those val­ues ran­dom­ly each year. They have a process (which is sim­ply a way of instan­ti­at­ing a val­ue into a com­pa­ny behav­ior).

Predicting the future is real­ly hard — I’d bet more on a com­pa­ny’s dis­ci­pline (process) of man­ag­ing a div­i­dend, espe­cial­ly com­pa­nies that have a long his­to­ry of doing so & where the CEO is moti­vat­ed by stock price, than I would on spec­u­la­tion about the (future) price of oil.

It’s more like­ly that an unex­pect­ed oil spill would result in a div­i­dend cut. The cur­rent cli­mate of trans­paren­cy and over-sen­si­tiv­i­ty to favor­ing share­hold­ers over oth­er stake­hold­ers would prob­a­bly force a com­pa­ny to cut their div­i­dend even if a spill did­n’t have a long-term detri­men­tal effect on the com­pa­ny. One could argue that the BP spill did­n’t have a long term finan­cial effect on the com­pa­ny (I mean, real­ly long term, like 10 years or more). But, the cli­mate was such that they had to cut the div­i­dend due to exter­nal pres­sures and per­cep­tion around their behav­ior. That was­n’t the case when the Exxon Valdez crashed in the Prince William Sound. I’m not mak­ing an eth­i­cal judge­ment on their behav­ior here — but when that hap­pened in 1989 it did­n’t force a div­i­dend cut, and Exxon lat­er went on to have record break­ing prof­its, not just for Exxon but for the entire oil indus­try.