With the price of oil falling from $110 to less than $50 a barrel since last June it's understandable that investors in the sector might be feeling nervous. Relative to the market, the oil sector as a whole has underperformed by 36% over the past six months. But share prices aside, given that blue chips like BP and Royal Dutch Shell pay out chunky dividends each quarter, income investors would be forgiven for feeling particularly vulnerable right now.
Analysts have been sounding alarm bells about this for a while. Last year Morgan Stanley said that dividend cover - a key measure of dividend sustainability - tends to evaporate for many energy firms when oil trades at $70 or less.
In December, JP Morgan analysts admitted that they'd been concerned about the oil majors' lack of free cash flow to cover dividends when the oil price was as high as $100+. They claimed: “If we stay below that level for the foreseeable future, then these dividends will be paid out of debt and balance sheets will be stretched."
Disappearing dividend cover
A look at some of the largest UK traded stocks in the oil & gas production and services sectors reveals that dividend cover was actually pretty high last year. The median cover in our list of 12 stocks (below) is a reasonable 2.4x earnings. Anything less than 1x suggests a company is paying out more than it earns.
Currently, only Tullow Oil - last year's worst performing FTSE 100 stock - carries negative dividend cover. This week the group announced £2.2 billion of write-downs on its assets ahead of its preliminary results in February.
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Name |
Mkt Cap £m |
Yield % |
DPS |
Div Cover |
DPS Gwth % Forecast 1y |
% 3m EPS Upgrade FY1 |
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