Oil companies are giving dividends 'far in excess of historical norms' -- and it's totally fine

Investors in the world’s largest oil companies are worrying that the energy groups will run into trouble when it comes to paying out dividends.

This is because they believe that the combination of a low oil price, operating cost reductions, and the issuance of scrip dividends — additional stocks given to shareholders in proportion to their current amount held — would make bigger payouts unsustainable.

However, Barclays’ analyst Lydia Rainforth and her team said investors shouldn’t be worried at all. This is because oil companies are actually doling out returns to shareholders that tally up better in proportion to their net present value than over the previous four years (emphasis ours):

In effect it appears that the market consensus is that the Big Oil companies have been over-distributing dividends to shareholders. We disagree — we believe that the industry became too complex both from an operational perspective, but also a capital spending perspective, relative to what is optimum.

Our view is that the companies have been overspending in the past five years, not over-distributing. As we highlight in this report, asset impairments and exploration charges in 2010- 2014 were the equivalent of 70% of the dividends paid. As such a renewed focus on delivering the best return projects and not everything that delivers a positive NPV is likely to drive more value for shareholders and enable the current dividend payments to be sustained.

We continue to see significant value in the European oils and given the starting point on costs there is a substantial and sustainable opportunity to right size the cost base.

Here’s the chart that Barclays analysts used in its Global Oil & Gas Weekly note to demonstrate why oil companies are stumping up better valued returns to investors without over reaching:

Royal Dutch Shell, BP and Total are currently offering shareholders yields that are “far in excess of historical norms,” said Barclays.

Total is offering over 5% while BP and Shell are offering over 6.5% to investors. However, oil hit a six month low on Monday. Prices for Brent and WTI are both down around 50% from the first half of 2014.

WTI is hovering around $US44.56 per barrel while Brent is around $US50.10 per barrel.

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