5 More Energy Stocks That Could Cut Their Dividends ...
Nice to see WCP and SGY are not mentioned in this article.
Hess and 5 More Energy Stocks That Could Cut Their Dividends, According to an Analyst
By Avi Salzman
Updated Jan. 22, 2020 4:13 pm ET / Original Jan. 22, 2020 1:40 pm ET
Two oil-and-gas companies have cut their dividends in the past month, a worrisome sign for the industry. A new report attempts to predict which others could do the same in the months ahead.
Earlier this month, Range Resources (ticker: RRC) said it would suspend its dividend, and last month Core Laboratories (CLB) said it would slash its payout by 55%. “CLB shares now yield 2.6%, down from 4.9% before the dividend cut announcement, though at a more reasonable payout ratio within projected 2020 earnings,” wrote CFRA Research analyst Paige Meyer.
Dividends are particularly important in the energy industry right now. Oil companies, once considered strong investments for their production growth, are now more like value stocks. They tend to have high dividends, and have been cutting back on capital expenditures to preserve their cash flow, even if that means production growth is lower.
Meyer examined other oil-and-gas companies to try to figure out which might be vulnerable to a cut. She found six companies that she thinks could be at risk. Among the factors she considered are the companies’ overall leverage, their payout ratios (how much of earnings go toward the dividend), and their history of cutting or suspending dividends. Meyer is particularly concerned about companies that produce a lot of natural gas because the price has been falling and could continue to drop.
Meyer identified two stocks— Hess and ARC Resources —that she says have a “a sizable risk of cutting their dividends over the next 1-2 years.”
Hess (HES) has a dividend payout ratio of 362% of expected 2020 profits, according to Meyer, meaning the company is planning to pay out far more cash to investors than it is earning. Hess has paid 25 cents per quarter since it raised its dividend in 2013. The company didn’t respond to a request for comment.
ARC Resources (ARX.Canada), a Canadian oil and gas producer, has a projected payout ratio of 401% for 2020, Meyer calculates. The company’s leverage ratio is “conservative” but its high payout ratio and a “regulatory overhang” in Canada could be problematic, she writes. The company didn’t reply to a request for comment.
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ARC has previously said it is spending less on capital investments, which should keep its dividend safe. “With lower facility and infrastructure capital investments in 2020 compared to the last several years, funds from operations generated in 2020 are expected to fund ARC’s dividend obligations of $212 million and ARC’s capital program of $500 million,” the company said in its third-quarter earnings report.
Companies that are at “moderate risk” for a dividend cut include Apache (APA), EQT (EQT), Murphy Oil (MUR), and SM Energy (SM), Meyer writes.
Apache (APA), an independent oil and gas producer, could also be vulnerable, Meyer says, given its projected 547% payout ratio in 2020. About 60% of its production in the third quarter of 2019 came from the U.S., but the company is expanding to explore for oil off the coast of Suriname, which borders Venezuela.
“As an exploration and production company, we believe that free cash flow is a more appropriate indicator of our ability to sustain the dividend,” wrote Apache spokesperson Phil West in an email to Barron’s. “We have stated publicly that we will establish an annual capital budget that enables us to sustain the dividend at current levels.”
EQT is primarily a producer of natural gas, and also owns midstream assets. An acquisition from a few years ago hasn’t helped the company’s results much, according to Meyer. “The November 2017 deal to acquire the former Rice Energy for $6.7 billion has, so far, been underwhelming, we think, and with weak natural gas prices in the industry, new leadership has its work cut out for it,” Meyer writes. EQT declined to comment.
Murphy Oil is a global oil and gas producer that is trying to focus more on liquids than gas. It is expected to pay out all of its earnings as dividends this year, a risky proposition, Meyer says.
“Murphy Oil has a long standing dividend dating back to 1961, and since then has paid out over $6.3 billion to shareholders, with over $4.4 billion in just the last 10 years,” Murphy spokesperson Kelly Whitley said in an email to Barron’s. The board approves dividends with “the intention of keeping the payouts competitive. Furthermore, as evidenced by the long history and payouts, the dividend is an important piece of our investments thesis that we have to offer to our shareholders.”
SM Energy, an oil and gas producer with operations in the U.S., is also at risk, Meyer says, She cites the company’s exposure to natural-gas liquids, predicting that prices will fall this year. “In addition, the company has both high debt levels as well as a weak free cash flow outlook in 2019,” she wrote.
A spokeswoman for SM said she had no idea how CFRA reached the conclusion that the dividend could be at risk. CFO A. Wade Pursell expressed confidence in the company’s financial position at a November investors’ conference, saying that it is “on the verge of generating free cash flow.”
https://www.barrons.com/articles/hess-and-5-more-energy-stocks-that-could-cut-their-dividends-51579718402