One analyst says that investors should expect dividend cuts in big oil after long-time industry leader Chevron reported a quarterly loss for the first time since 2002.
“There will come a day where dividend is at risk and that day is today,” Oppenheimer senior analyst Fadel Gheit told CNBC’s “Squawk on the Street.”
“Not only Chevron, but the rest of the industry is currently funding dividends through additional borrowing. You can’t do that forever,” Gheit said.
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Although Gheit is anticipating Chevron to cut its dividend any day now, the company is likely to seek alternative solutions first. Chevron already stopped its share buyback program last year. In October, Chevron cut 6,000 to 7,000 jobs. The company also announced in December a capital budget cut of 24 percent for 2016.
In December, Chevron CEO John Watson said on “Power Lunch” that the dividend was the company’s priority.
“We generate enormous cash flow, even at low prices. So we’re going to do everything we can to cut future spending,” said Watson.
Raymond James senior energy analyst Pavel Molchanov told “Power Lunch” that he thinks big oil could weather the lower-for-longer trend.
“Even if oil stayed at $40 for several years … they can cut spending to a level that is consistent with current levels of cash flow … but they can still service their debt, and roll over their bond maturities and there wouldn’t be any kind of restructuring or Chapter 11,” Molchanov said.
“Dividend is going to be the last thing the company will touch. It’s a sacred cow.”
CastleArk Management President and CIO Jerry Castellini told “Power Lunch” that he isn’t too worried about Chevron’s dividend at the moment.
“If we don’t have a price action on the upside, they’ll clearly have to dramatically reduce capital spending if they don’t want to borrow to pay that dividend,” Castellini said.
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If oil prices rebounded, big oil companies would be less pressured to cut capital expenditure or dividends. Both Castellini and Molchanov are optimistic and believe that the market will see a rebound in oil in 2016.
“Oil prices at $30 are completely unsustainable … Saudi Arabia is running $100 billion budget deficit. It’s not something that can last forever,” said Molchanov, adding that he sees a “$60 minimum by the end of the year.”
“My suspicion is we’re going to get the relief on oil prices well within the next six months. The entire global economy now depends on that,” Castellini said.[“source -cncb”]