By John Gallagher,
International Business Assistant Editor
Large, profitable corporations reward shareholders for investing in their company by returning cash to shareholders in the form of dividends and share repurchases.
Share repurchases take shares off of the streets boosting the value of each individual share.
The price of a share is calculated by dividing market capitalization, or the value of all shares outstanding, by the number of shares outstanding.
As the number of shares decreases, the value of the denominator decreases, thus increasing the individual price of each share.
Dividends are a simpler method, as companies simply write a check to their shareholders each quarter.
The world’s largest energy companies, Exxon Mobil (NYSE: XOM), Royal Dutch Shell PLC (NYSE: RDS), Chevron Corp. (NYSE: CVX), and BP PLC (NYSE: BP) are all companies well known for returning cash to their shareholders through dividends and share repurchases.
This year’s dramatic drop in oil prices have left these firms with a decision; take out debt to finance dividends and stock repurchase plans, or tighten their belts and cut payments to shareholders as $30 oil weighed on profits.
On average, these four companies’ revenues declined 35 percent in 2015 from 2014, Royal Dutch Shell taking the biggest hit with a 37 percent decrease in revenue.
An Economist article “Oil Companies: In the dark ages” identified BP’s net loss of $6.5 billion in 2015 and Chevron’s fourth quarter loss. Exxon Mobil, on the other hand, fared relatively well in 2015 turning a profit of $16.2 billion, which was about a 50 percent decrease from the year earlier.
Facing huge drops in net income, oil companies have been taking out higher debt loads to continue paying a dividend, doing damage to their credit rating.
A lower credit rating means it costs more to borrow in the future.
The largest of the four, Exxon Mobil’s AAA credit rating is being threatened as they remain loyal to their shareholders by raising their dividend for the 33rd straight year.
Although Exxon’s dividend remains, they are most well-known for returning cash to their shareholders through stock repurchases.
According to a Reuters report, Exxon has spent more on share buybacks than any other company in the past 10 years, $210 billion.
The second biggest spender in this category is Microsoft, spending only $125 billion.
Exxon has decided to suspend their share repurchases in response to the fall in oil prices and the corresponding fall in revenue.
In 2015, Exxon spent only $4 billion on share repurchases, the lowest figure since 2000.
They will still buy back some shares, but only to offset the dilution felt from additional shares awarded to employees, not to boost the share price.
In further efforts to reduce expenses, they are also planning to reduce capital expenditures by 25 percent in 2016, with most of the reductions coming from their exploration and production business, per a Barron’s article.
While the biggest oil companies are remaining loyal to their shareholders, the smaller companies such as Conoco Phillips (NYSE: COP) and Hess Corporation (NYSE: HES) have cut their dividends during these tough times.
The fall in oil prices have been one of the main driving forces behind recent market turmoil. Now we are seeing big oil’s response to these market conditions.
Be on the lookout for smaller oil companies to default on their debt the corresponding banks that own this debt.
A version of this article appeared in the Tuesday, February 9th print edition.
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