Is the Oil Industry Off a Cliff or Just in a Down Cycle?

Low prices are forcing companies to curtail exploration and spend to sustain dividends and stock value as the world looks to curtail emissions.

With the oil industry facing what could be its worst downturn in more than 45 years, the major companies are taking extraordinary, perhaps even desperate, measures to preserve their dividends.  This is raising the question of whether the current price slump is just another in a long history of down business cycles, from which oil companies always emerge victoriously, or a sign of more deeply troubled times ahead.

The companies and Wall Street analysts argue that the downturn will reverse as all others have in the past because the world still needs oil, and a lot of it.  But some worry that climate change regulations and other new threats could instead force the oil and natural gas business into a tailspin like the one the U.S. coal industry is experiencing.

What side of that argument you fall on will color how you see the oil companies’ current behavior.  Oversupply has dropped crude prices to less than half of last year’s highs, and companies are  propping up profits by cutting jobs, selling assets and slashing oil exploration.

They are doing this to avoid reducing dividends—the main reason oil stocks remain an attractive investment.  Many investors stick with them because of nearly automatic payouts of 3.7 percent to 6.5 percent— well above the 2.2 percent yield of the benchmark 10-year Treasury note.  It’s so crucial to supporting share prices that ExxonMobil, Chevron, BP, Royal Dutch Shell and others "are basically deficit spending" to sustain dividends, according to Fadel Gheit, managing director and senior oil analyst at Oppenheimer & Co.

In addition to market challenges, however,  oil companies face something they’ve never dealt with before:  a global call to shift the world’s economies to renewable and low-carbon energy. From the Bank of England to the Pope, international government groups and the world’s largest sovereign wealth fund, there’s a growing push to phase out fossil fuels to save the world from catastrophic warming.  This may leave the oil companies with billions of dollars in petroleum reserves that may never be tapped, making them “stranded assets,” some industry analysts say.

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