The energy sector continues to make fools of us all.
Oil and natural gas prices continue to drift lower, and profits at many energy stocks haven’t exactly been the pocket liners many investors are used to. With the oil rout continuing, lower profits and dwindling cash flows are spanking investors where it counts — their wallets — and dividends are being cut or eliminated left and right.
Natural gas specialist Chesapeake Energy (CHK) was the latest in a group of diverse energy stocks to eliminate its dividend altogether. And with oil being so low for so long, analysts postulate that more dividend cuts could be at hand.
Fidelity fund manager John Dowd perhaps said it best: “The industry has not been generating enough money to cover its capital spending and dividends.”
With that in mind, many investors holding energy stocks with big dividends may start seeing smaller payouts on the horizon. But which ones? Here are three energy stocks that could cut their dividends before you know it.
Dividends on the Chopping Block: Denbury Resources (DNR)
Current Dividend Yield: 6.6%
When it comes to energy stocks, Denbury Resources (DNR) is a bit of an odd bird.
That’s because it’s not really a traditional exploration and production firm. DNR is an expert in enhanced oil recovery using CO2 injection. Basically, Denbury will go into older and declining oil fields, shoot old wells full of Carbon dioxide, then collect any extra oil that is pushed up from the well. Many older wells — even with artificial pump jacks — eventually top out and physically can’t get oil to the surface without help.
In boom times — like when oil is at $90 per barrel — DNR pads out its bottom line. But when oil is so cheap — like at $45 per barrel — it really starts to kill Denbury and its entire business model.
CO2 injection is a very expensive process. You need that higher oil price to really even break even on a lot of wells.
Denbury’s situation looks even worse when you consider that, as of the most recent quarter, DNR had a hefty debt load of $3.63 billion … and a paltry $6 million in cash to set it off.
Denbury’s dividend is not particularly established. It started just last year at 6.25 cents per share and hasn’t changed since. The only reason the headline yield is so large is because DNR shares have been battered by 80% from their 2014 highs. (The old saying goes, the quickest way for a dividend to double is for a stock to get cut in half.)
Denbury’s profits are dissipating, the debt load is enormous and DNR’s dividend hasn’t been around long to begin with, making this payout a likely candidate for cutting or elimination.
Dividends on the Chopping Block: Linn Energy (LINE)
Current Dividend Yield: 22.6%
Like DNR, Linn Energy (LINE) joins a long list of odd energy stocks with large dividends. LINE is structured an upstream master limited partnership. And as an MLP, LINE is basically a pass-through entity, pushing much of its cash flows back into shareholder wallets as fat dividends.
But with oil floundering below water, there’s less cash to go around. In fact, LINE already cut its dividend at the beginning of the year when the oil rout first started.
But even its already-lowered dividend might not be enough; things have continued to deteriorate for Line Energy.
As of its most recent quarter, Linn’s debt has ballooned to a whopping $10.4 billion and its credit facility remains pretty much maxed. Meanwhile, the lower oil price has thrown a huge wrench into its recent and hard-fought acquisition of Berry Petroleum. Many of those wells aren’t exactly profitable at today’s oil prices.
And many analysts are worried about Linn’s high debt levels.
The longer oil prices continue to stay down, the more difficult it will be for LINE to pay that heavy debt load and keep up with its dividend.
Recent drilling partnerships and asset sales will help LINE stick around longer-term, but the current payout probably won’t survive.
Dividends on the Chopping Block: BP Plc (BP)
Current Dividend Yield: 6.6%
One of the biggest energy stocks on the planet might seem like an odd candidate for a dividend cut, but for a giant like BP (BP), a cut could be in the works.
When it comes to the majors, BP is one of the heaviest tied to oil prices. That reliance on oil — and many expensive deepwater and offshore projects — is causing headaches for BP. Cash flows and profits at the energy firm are dropping hard. And analysts only expect the company to earn $2.41 per share in 2015. That’s about a penny more than its annualized dividend yield.
But longer term, BP may need to slash its dividend.
According to Merrill Lynch, even if oil were to rise to $70 per barrel, BP still wouldn’t have sufficient cash flows to pay its $6 billion in current dividends. Expanding that further, Goldman Sachs (GS) predicts a hefty cash flow deficit by 2018, even though BP has already worked on cutting expenses, such as trimming capex by 30% and operational spends by 24%.
Given its massive size and need for big projects to move the needle, GS predicts that dividend cuts are inevitable.
The only thing that could protect BP’s dividend is its sizable cash reserves ($32 billion as of the most recent quarter). But still, of the energy majors, BP’s dividend certainly looks among the shakiest.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.