The world’s oil giants could soon do the “unthinkable”…
As you may know, the oil market has been a bloodbath over the past couple years. After topping $100 a barrel in June 2014, the price of oil plunged 75%. This year, oil has rebounded, but it still trades for less than half of what it did two years ago.
Low oil prices have put more than a hundred oil companies out of business since 2014. According to accounting firm Deloitte, hundreds more could go bankrupt if oil doesn’t recover soon.
Plunging oil prices have also slammed the biggest names in the sector. Exxon Mobil (XOM), Chevron (CVX), BP (BP), and Royal Dutch Shell (RDS-A)—four of the world’s largest oil companies—have lost billions of dollars since 2014.
To offset the damage, these companies have cut spending to the bone. They’ve laid off thousands of workers. And they’ve sold pieces of their business.
But they haven’t touched their dividends…yet.
As you’re about to see, these companies could soon have no choice but to cut their dividends. This could cause their shares to plunge.
Still, that doesn’t mean you should avoid all oil stocks. Today, we’ll tell you about one oil company poised to deliver big gains in the coming years.
But first, let’s look at why the world’s oil giants refuse to cut their dividends.
• Big oil companies are some of the most dependable dividend payers on the planet…
Chevron has raised its annual dividend for 30 straight years. Exxon has increased its dividend 34 years in a row. Royal Dutch Shell hasn’t cut its dividend since World War II.
For many shareholders, these dividends are a foundation of their family’s wealth. They’re “sacred”, like grandma’s ring or the family farm.
If these companies ax their dividends, investors could bail. Their stocks could crash. That’s not something these companies can afford right now.
• These companies aren’t making enough money to pay their dividends…
The Wall Street Journal reported last week:
Executives at BP, Shell, Exxon and Chevron have assured investors that they will generate enough cash in 2017 to pay for new investments and dividends, but some shareholders are skeptical. In the first half of 2016, the companies fell short of that goal by $40 billion, according to a Wall Street Journal analysis of their numbers.
That’s a big problem. According to Bloomberg Business, these four companies along with Total S.A. (TOT), the giant French oil company, have promised to pay $40 billion in dividends next year.
According to The Wall Street Journal, these companies are paying out more money in dividends than they’re making right now:
The companies spent more than 100% of their profits on dividends last year. This year, the problem got worse. In the April-to-June period, Exxon paid $3.1 billion in dividends and had just $1.7 billion in net income, according to S&P Global Market Intelligence. Shell paid $1.26 billion in interest in the first half of 2016, compared with $726 million in the same period a year earlier.
According to research firm FactSet, Chevron has a payout ratio of 249%. That means it paid $2.49 in dividends for every $1.00 in earnings over the past year.
These companies could soon run out of cash to pay dividends. But remember, these companies will do whatever it takes to defend their dividends.
• The world’s oil giants have borrowed billions of dollars to keep paying their dividends…
The Wall Street Journal reported last week:
Exxon Mobil Corp., Royal Dutch Shell PLC, BP PLC and Chevron Corp. hold a combined net debt of $184 billion—more than double their debt levels in 2014, when oil prices began a steep descent that eventually bottomed out at $27 a barrel earlier this year. Crude prices have rebounded since, but still hover near $50 a barrel.
These companies are now more indebted than ever. And their dividends have never been in more danger.
• To preserve their dividends, these companies could sell more assets or lay off more workers…
But that could cost them millions, even billions, of dollars down the road.
You see, dividends don’t help a company grow its profits. All they do is return money to shareholders.
Meanwhile, a company could miss out on future revenues if it sells productive assets. If it lays off a team of engineers, it could become less efficient.
Borrowing money to pay dividends is also short-sighted. Sure, this may help a company pay its dividend right now. But companies have to eventually pay back whatever money they borrowed, plus interest.
By maintaining their dividends now, companies risk losing a lot of money down the road.
• Plus, oil prices could stay low for a long time…
If you’ve been reading the Dispatch, you know oil crashed because there was simply too much of it.
High prices and new methods like “fracking” caused global oil production to soar. Over the past decade, U.S. oil output has nearly doubled. Last year, it reached its highest level since the 1970s. Other key oil-producing countries are pumping record amounts of oil.
Oil left the ground faster than it was consumed, which caused prices to plummet.
• U.S. oil production has come down in recent months…
But Saudi Arabia and Russia, two of the world’s biggest oil-producing countries, are still producing record amounts of oil.
Oil prices will stay low as long as these key countries continue to pump huge amounts of oil.
Dozens, even hundreds, of oil companies could go out of business in the months ahead. We could even see some of the world’s top oil companies cut their dividends.
• If you want to own oil stocks, make sure you own the best…
We like companies with healthy profit margins, quality assets, and little to no debt.
This year, Nick Giambruno, editor of Crisis Investing, recommended a company that checks all these boxes.
As you may know, Nick sees the world differently than most investors. He views a crisis as an opportunity, not something to fear.
You see, a crisis is one of the only ways to buy world-class companies at deep discounts. Occasionally, a crisis will give you the chance to buy a dollar’s worth of assets for pennies.
• Nick has been closely stalking the oil market since 2014…
In March, he recommended a world-class oil company. At the time, the stock was trading at a 35% discount to its 2014 high.
According to Nick, the company has “trophy assets” and one of the industry’s strongest balance sheets. Most importantly, it can make money at as low as $35 oil.
• Unlike some of the world’s oil giants, this company has grown stronger since oil crashed…
Nick wrote in this month’s issue of Crisis Investing:
[The company’s] focus during the oil downturn has been to increase efficiencies so that it can thrive in periods of low oil prices. This includes well completion technology, precision targeting and cost reductions.
Nick says these efforts are paying off:
In the second quarter release, the company announced that it had increased the resource potential in its “premium locations” by over 75%. These are areas where it can earn at least a 30% rate of return at a $40/barrel oil price. At current drilling rates, that’s enough resources in premium locations to last the company more than a decade.
This stock surged after reporting second-quarter results. It’s now up 20% since Nick recommended it in March. But it could be headed much higher. The stock is still 23% below its 2014 high.
You can learn more about Nick’s top oil stock by signing up for Crisis Investing. To begin your risk-free trial, watch this video presentation.
This video also explains the proven method Nick uses to find investments with massive upside. As you’ll see, many of the world’s greatest investors used this same method to make billions.
Chart of the Day
Oil companies are dropping like flies.
Today’s chart shows how many North American oil companies have filed bankruptcy since the start of 2015. As you can see, low oil prices have already put 90 North American oil companies out of business since January 2015.
Together, these companies have folded on a staggering $66.5 billion in debt. About 75% of that debt went bad this year.
Many more oil companies could go broke in the months ahead.
According to global consulting firm Wood Mackenzie, $1.5 trillion worth of oil projects in North America need $50 oil to make money. The price of oil has averaged just $42 a barrel over the last year.
Delray Beach, Florida
August 31, 2016
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