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The energy sector has emerged as the best in recent weeks, with WTI crude oil prices climbing to their highest level in nearly eight months thanks to a flurry of potential Covid-19 vaccines. Optimism has returned in a big way to the oil markets. Also conservative BP Plc (NYSE: BP) has backtracked on its previous projections that we could have surpassed peak oil, with the company now saying oil demand may not peak until around 2030.
However, Big Oil is still far from out of harm’s way, with large dividend payers, in particular, remaining in a precarious position.
With WTI trading at ~ $ 45, Raymond James analyst Pavel Molchanov says ExxonMobil (NYSE: XOM) is not yet raising enough cash to fund its dividends and faces an “unenviable choice” between selling assets or taking on more leverage to support the dividend.
Last month, Exxon announced that it will keep its dividend at 87 cents a quarter, giving the company an incredibly high payout of 11%.
However, that yield has now dropped to 8.7% after XOM shares rose 23% over the past month.
Big decisions
Exxon faces big decisions on dividend trade-offs.
The company is still issuing cash at current oil prices, and needs a WTI crude oil price of ~ $ 50 / bb in order to handle its generous payout and continue with maintenance-level capital spending from cash flow as well operating.
Exxon needs ~ $ 8 billion in debt financing to maintain current dividend levels in 2021. However, Molchanov says divesting assets at potentially sub-optimal valuations is the most likely but unsustainable short-term solution.
During his last call on profits, Exxon revealed that it is in advanced negotiations on several potential divestments. Previously, the company said it has lined up $ 15 billion in potential divestments and is also considering selling North American dry gas business for a combined book value of up to $ 30 billion. If successful, the divestments would be classified as some of the largest write-downs ever seen in the oil industry.
Related: Climate targets could cut natural gas investments by $ 1 trillion
Fortunately for Exxon, the company can still borrow at attractive rates. However, during the earnings call he reiterated that he does not plan to increase the debt.
Raymond James analyst Pavel Molchanov told clients in a Friday note, as reported by MarketWatch, which Exxon has three ways to avoid its first dividend break in decades in what it called an “unenviable choice”.
- Breaking his promise of no more debt, which Molchanov described as “doable” but detrimental to credibility.
- Sell assets at prices that shareholders will not appreciate, but that would support dividend payments – a choice Molchanov described as “more likely” but not sustainable in the long term.
- Cut dividends, which the analyst described as a “radical approach” that probably wouldn’t have occurred for at least a year.
In any case, Molchanov has an equivalent “sale” rating on Exxon right now. And it is not alone.
Wall Street becomes positive for energy
After souring the industry for years, Wall Street is becoming increasingly positive about energy, with a growing number of analysts expressing optimism that the worst could be in the rearview mirror.
Bank of America is the latest to join the bullish camp and believes Covid-19 vaccines will help bring oil demand back to normal levels in a matter of months.
BofA analyst Doug Leggate has predicted that many oil and gas stocks will see a significant rally in 2021 if Brent prices are able to rise to $ 55 a barrel or more. Brent crude was trading at $ 70 in January before the pandemic caused the largest demand destruction in history.
BofA has an overweight rating in the energy sector and advised investors to focus on three types of stocks:
- Oil stocks exploited with bullish catalysts in sight, eg. Apache Corp. (NYSE: APA) e Hess Corp. (NYSE: HES)
- Oil stocks that pay substantial dividends e.g. ExxonMobil, Chevron Corp. (NYSE: CVX) e ConocoPhillips (NYSE: COP)
- Oil companies with the potential to increase their free cash flows through consolidations or other cost-cutting measures, e.g. Natural resources pioneer (NYSEPXD), EOG resources (NYSE: EOG) e Devon Energy (NYSE: DVN)
The medium-term outlook has improved significantly after news that OPEC and its Russian-led partners are likely to extend oil production cuts for another two to three months in an effort to keep markets strained and encourage further price recovery. of oil.
OPEC will meet on Monday to define its manufacturing strategy before meeting a group of Russian-led producers on Tuesday. OPEC + appears to have learned its lesson and members are expected to cooperate if the organization agrees to extend production cuts.
By Alex Kimani for Oil “
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