Of all the things that can go wrong for investors in oil exploration and production stocks such as Tullow Oil (LSE: TLW), losing your dividend is the least of them.
Most of us are looking for a thrilling blast of capital growth, rather than the steady trickle of a solid income stream. If you were after oil dividends, you would have invested in FTSE 100 majors such as BP and Royal Dutch Shell.
That’s why I am relatively sanguine about today’s news that Tullow Oil is dropping its dividend, because who invested in Tullow for the yield anyway?
Dividend Down
Following today’s decision to scrap its final dividend, investors in Tullow will inevitably be disappointed to pocket just 4p per share instead of the 12p they got in 2013.
But they will be more concerned by the 50% drop in the share price over the past 12 months (and 70% over three years).
Against that, the loss of 2.96% yield is small change.
Putting It Crudely
The big worry isn’t the dividend itself, but the reasons for cutting it. Like every oil stock, Tullow has been roiled by collapsing crude.
And that wasn’t all. It also suffered $729m worth of impairment charges and $1.66bn of exploration write-offs, which contributed to the $2.05bn full-year loss.
That is clearly a disappointment when set against Tullow’s $313m profit in 2013, although markets were warned, with management previously announcing a 16% decline in revenues to $2.21bn.
Low investor expectations partly explain why the stock fell less than 2% on the news. As did the fact that management seems to have a plan.
Happy Hedge
Chief executive Aidan Heavey inevitably pleaded the falling oil price, which made 2014 “a difficult year” across the industry.
He then announced planned cash savings of $500m over the next three years, by cutting capital expenditure, operating costs and administrative expenses.
Tullow has “reset” its business to focus its capital expenditure on “high-quality, low-cost oil production in West Africa”.
Careful use of hedging also protected revenues, with Tullow achieving a full-year average price of $97.50 a barrel, comfortably above today’s market average of around $56.
For even greater comfort, 60% of its 2015 entitlement oil sales are currently hedged with an average floor price of $86. Further hedges already in place for 2016, 2017 and 2018.
Dropping the final year dividend looks a sound move, given the pressures. Few investors will be complaining about that, as Tullow has protected itself against events that are largely beyond its control.
It’s the share price that counts. And today, it looks cheap. Now let’s see what Tullow can do to revive that.
