My best oil stock for the coronavirus crash just kept a big promise
The 2020 coronavirus pandemic destroyed more demand in the oil industry than ever before in history. Measures taken by governments to stop the spread of the virus that causes COVID-19 have reduced oil consumption by 25% or more. In the United States, gasoline consumption has fallen to levels last seen during the Vietnam War.
And although oil prices have since rebounded U.S. crude futures turned negative on April 20, the worst is yet to come for many oil companies: oil production continues to exceed demand, and storage facilities lack available capacity. We have already seen several prominent oil companies go bankrupt, and more bankruptcies are coming.
But even in the midst of the turmoil, an integrated oil and gas giant continues to deliver strong results and delivers on its promise to its shareholders. May 6, Phillips 66 (NYSE: PSX) declared a quarterly dividend of $ 0.90 per share, the same amount it paid last quarter, while many other oil stocks are cutting dividend payments just to stay afloat.
Strong experience in paying dividends even as others need to reduce
If there’s one thing to remember about Phillips 66’s dividend this quarter, it’s that it hasn’t gone up. This breaks the company’s streak of increasing payment at least once a year since 2012, when it was split. ConocoPhillips (NYSE: COP) as an autonomous company. During that nearly eight-year period, the dividend has increased by 350%, from $ 0.20 per share to $ 0.90 per share today.
But beyond the interrupted streak of annual dividend growth, Phillips 66 is a rarity in the oil industry in that it has been able to maintain its payout, while many other midsize companies have had to. cut their dividends make ends meet. In addition, as oil producers face a cash shortage and the sea of crude in storage prevents oil from draining off the ground, more high-yielding intermediate stocks will be forced to reduce their payments soon.
Why Phillips 66 can maintain its dividend
Many oil companies that had to cut their dividends in this unprecedented crash have had their hands forced by market conditions related to their core business. We’ve seen just about every independent oil producer that pays a dividend has to cut the payout, as oil prices and demand have fallen sharply, cutting off a significant portion of their cash flow very quickly.
One of the most notable is Western Oil (NYSE: OXY), which entered the oil crash in dire straits after last year’s $ 55 billion acquisition of Anadarko Petroleum. Therefore, the company had to reduce its payment by more than 80% and is still in financial difficulty.
Same integrated supermajor Royal Dutch Shell (NYSE: RDS.A) (NYSE: RDS.B), with nearly $ 22 billion in cash in the bank, has decided to reduce its dividend by two thirds recently.
Phillips 66 is able to keep its dividend in place as its operations insulate it from much of the drop in oil prices, and it also relies on a much more stable business – natural gas – to fuel much of it. of its profits. and cash flow.
What to expect
While a reduction in payments going forward cannot be completely ruled out, I expect the management at Phillips 66 to continue to act cautiously to maintain or even increase the dividend over the next few quarters. On the first quarter results call, CEO Greg Garland described the dividend, which costs around $ 400 million per quarter, as “very affordable” based on the company’s cash flow.
One of the reasons it’s affordable is that management keeps debt at very conservative levels so the company can handle oil market cycles. As CFO Kevin Mitchell said on the earnings call, executives want to “come back at times like this, [with] the ability, the ability to issue additional debt, to weather the storm, to get through the other end and not negatively impact credit ratings and our ability to access debt markets. “
So as other oil companies entered the recession with high leverage and with limited or no options beyond cutting their dividends, Phillips 66 is able to deliver on its promise to pay shareholders. to overcome the recession with the company. This is largely why Phillips 66 remains my main stock of oil to own during the 2020 oil crash.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.