FTSE 100 oil giants BP (LSE:BP) and Shell (LSE:RDSB) made big announcements this week, ending a remarkable month of oil price volatility and headline news.
BP made the far-reaching decision to increase its debt but continue paying a dividend to shareholders. Shell opted to cut its dividend by 66% to avoid the burden of further debt.
This was a major decision by Shell and unexpected by many, myself included. Shell had enjoyed a perfect dividend-paying record for over 70 years!
Are the days of ‘Big Oil’ investment numbered?
With so much negativity already stacking up against the oil industry, the coronavirus pandemic and geopolitics have landed it in a precarious position. Environmental issues are of mounting concern, demand has come to a standstill, and storage options are running out.
Saudi Arabia and Russia began escalating their oil price war in March, kicking off the historical price slide. Meanwhile, geopolitical tensions are running high between the US and Iran.
The pandemic has caused oil demand to halt, but this is an unnatural and unexpected pause in an otherwise demand-driven industry.
Storage is a whole other matter. Where does the world store the millions of excess barrels of oil it has pumped out of the ground? Storage options are few and their scarcity has driven storage costs through the roof.
I don’t know which company made the most sensible decision for the long term. For shareholders, dividends were the principal attraction to oil companies. BP and Shell also feature highly in equity income funds, precisely for this reason.
Without dividends, you’re left investing in a company that’s increasingly unfavourable in its global position.
For this reason, I think Shell will hurt from cancelling its dividend. However, if it pays down its debt and comes through the oil downturn positively, oil demand will return, and it can reinstate its dividend with confidence.
The BP dividend gamble
BP has possibly made the right decision for now. There are so many companies slashing dividends that income investors are running out of options. This could make BP attractive to some. However, saddling a company with even more debt when the outlook for the oil industry is so poor, is risky.
Perhaps its thought process hinges on the fact interest rates are so low just now. Taking a loan could prove a better gamble than alienating shareholders. All very well if the oil price regains previous highs, and production can be ramped up again. Neither of which is certain.
I think the demand for oil will increase again, but not in the near term. There is the surplus to get through first and in doing so, companies must restructure and streamline. There will no doubt be buyouts, bailouts, and bankruptcies along the way.
I still think both BP and Shell will survive, but they could be quite different versions of themselves come time.
If I were buying shares in either of them today, I would opt for BP. It seems to have a forward-thinking CEO; it takes investors’ interests into account and I think its firm stance on renewables will stand it in good stead going forward. If it can get through the production cuts, then I think its share price will recover the quickest.
