Investors playing the oil sector have drilled mostly dry holes for some time now. Not even the top-tier operators have been able to deal with the mess.
Just look at ConocoPhillips (COP). Over the past year, the market value of the stock has cratered by a grueling 44%. Ouch!
And there seems to be no sign of improvement, as seen with the latest earnings report. During the fourth quarter, ConocoPhillips reported an adjusted loss of 90 cents a share and revenues plunged by 43% to $6.77 billion.
The Street consensus, on the other hand, was calling for a loss of 65 cents a share and revenues of $9.06 billion. Given this big-time miss, it should be no surprise that ConocoPhillips stock is taking a deep plunge in Thursday’s trading.
ConocoPhillips Takes Drastic Action
No doubt, the company is moving swiftly, reducing its capital spending budget for 2016 from $7.7 billion to $6.4 billion. This was actually the second reduction in the past two months.
And you know it’s bad when COP announces a steep cut to its dividend. Instead of the quarterly outlay on COP stock being at 74 cents a share, it will now be at only 25 cents a share. To put this into perspective, this is the first cut in at least 25 years.
This certainly highlights that the problems in the energy sector are likely not to be temporary. According to ConocoPhillips CEO Ryan Lance:
“While we don’t know how far commodity prices will fall, or the duration of the downturn, we believe it’s prudent to plan for lower prices for a longer period of time.”
What’s more, the cut in the dividend on COP stock is an alarm bell — that is, even the top-tier operators are not immune from having to take drastic actions. In other words, it’s a good bet that the juicy dividend yields will not last for long. Interestingly enough, the move by ConocoPhillips is likely to provide comfort for other major oil companies to follow suit.
Even a big player like Chevron (CVX) could be in jeopardy. At least, this is the opinion of one of the oil industry’s top analysts, Oppenheimer’s Fadel Gheit. He says that CVX has maintained its dividend with heavy borrowing, which cannot last.
Keep in mind that the annual payout for CVX is $8 billion, but the free cash flow has flatlined. There is also only $13.2 billion in the bank and the long-term debt load is at a hefty $38.6 billion, up from $27.8 billion on a year-over-year basis. All in all, there is not much room to maneuver.
Attention Value Hunters
ExxonMobil (XOM) is perhaps the best positioned in terms of a secure dividend. Unlike ConocoPhillips — which spun off its upstream unit, called Phillips 66 (PSX) — XOM has benefited from a diversified business.
So as the production side has plunged, there has remained strong growth in chemicals, refining and retail sales of gasoline. In other words, XOM has continued to crank out positive free cash flows. It also helps that the company is only one of a few that sports a AAA credit rating.
Now, while all this seems grim, the fact is that there should be a great opportunity for investors to pick up compelling values. Although, you need a long-term perspective since it is really impossible to find the bottom.
Prices should firm up over the next couple of years due to the impact of slashed capital budgets and lower production levels. At the same time, the demand for oil is likely to increase.
According to research from XOM, the forecast is for a 25% increase by 2040, driven primarily from the expected two billion jump in the global population.
So XOM should benefit from this, but so should other top-tier oil operators, such as CVX, Royal Dutch Shell (RDS.A, RDS.B) and yes, COP stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
