Isabelle Chaboud, Professor in the accounting, law and finance department, Grenoble Ecole de Management

Despite falling oil prices, ExxonMobil announced a record dividend of $ 12.2 billion, surpassing even Apple. Is it sustainable over time?

Although ExxonMobil’s first quarter results were better than expected, they still fell significantly compared to last year (down $4.2 billion). Yet the Board of Directors declared a dividend of $ 0.73 per share up 5.8% from last year and hopes to maintain share repurchases at $ 1 billion in the second quarter 2015 (as the first quarter of the new fiscal year).

Increasingly pampered shareholders

In early May 2015 the market capitalization of Exxon Group amounted to $ 372 billion while Apple’s market capitalization soared to 742 billion – now twice that of ExxonMobil. But paradoxically the oil company is treating its shareholders more than ever, paying an annual dividend rate of $12.2 billion, ahead of the $12 billion paid by Apple.

Exxon Mobil’s shareholders can celebrate, whereas Apple’s may find they are not so well off, despite glowing results! On April 27^th, 2015, Apple declared a dividend of $ 0.52 per share against $ 0.47 in the previous quarter, an increase of 10.6%, but Apple could have done better, as sales rose 27 % in the second quarter and earnings grew by 34%. If we take into account the share buybacks, earnings per share even increased by 40%.

Dividends and repurchases of shares: priority of the supermajors

BP and Total have chosen to focus on shareholders’ performance as a top priority. If BP and Total have preserved their cash by limiting investments, over the last two years ExxonMobil Corporation has used accumulated cash from past decades.

At the end of December 2014, the Exxon Group had $4.6 billion in cash and its short and long-term investments were $ 35 billion (decreasing however compared to $41 billion in 2013). These figures already include dividend payments of $11.5 billion in 2014 ($ 10.9 billion in 2013) and share buybacks of $ 13.1 billion in 2014 (15, 9 billion in 2013).

ExxonMobil Corporation and Chevron are still neck-and-neck in shareholder remuneration. If ExxonMobil Corporation has tended to favor buybacks, Chevron has generally made a greater distribution of the earnings: 41% against 36% for Exxon in 2014. Whereas Exxon increased its dividend per share almost 10% between 2013 and 2014 against 7.9% for Chevron over the same period. What is the best strategy?

Everything depends on the expectations of investors. If they prefer immediate return, they will tend to favor Chevron, if they are looking for a tax benefit and an increase in dividends, they will be directed towards ExxonMobil. In any case, these two large American groups have used their shareholders to receive steadily increasing dividends. ExxonMobil has paid dividends to its shareholders for the last 100 years and has consistently increased its dividends over the past 30 years.

ExxonMobil continued its policy of dividend payments and share buybacks in 2014 and announced even better returns for 2015. Chevron announced for 2014 a dividend increase for the 27th consecutive year. John S.Watson, Chairman of the Board and CEO of Chevron Corp., stated in the 2014 annual report that the total return to shareholders (Chevron) was 11.5% and 11.4% per year over the past five years and the last ten years, respectively.

Is this momentum sustainable?

These majors were seen so far by shareholders as safe investments with regular and almost guaranteed returns. But in the context of falling oil prices and pressure on gas prices, how are these majors going to continue pampering their shareholders?

Today’s low interest rates may allow them to go into debt eventually. ExxonMobil has little debt. Currently, its debt to equity ratio amounted to 19.7% in 2014 (against 16.22% in 2013). As for Chevron Corporation, the ratio is even lower at 17.8% in 2014 (against 13.58% in 2013).

But if they choose this option, they must avoid borrowing too much to prevent their credit rating from deteriorating and a possible rise in interest rates. To satisfy their shareholders, the majors have opted to reduce their investments, at least in the short term. Exxon has plans to reduce its investments to $ 34 billion in 2015 (against $38 billion in 2014).

They are also engaged in asset disposal programs. BP has already sold nearly $22 billion of assets in 2013 (following the disaster in the Gulf of Mexico), $ 3.5 billion in 2014 and expects a further $10 billion over 2015. Exxon sold for $4 billion assets in 2014. In 2014 Chevron launched an asset disposal program amounting to $ 10 billion over three years.

At the end of 2014, $ 5.7 billion assets had been sold. Finally, to continue paying dividends, the majors may also lower their plans for share buybacks. Chevron has already announced that it would not buy back any common stock in 2015 when the group had repurchased $5 billion of its own shares in 2014.

The majors are heading in the direction of maintaining shareholder returns by reducing investments, share buybacks and pursuing an asset disposal program. However, the majors will have to make choices at some point if they want to continue their exploration efforts. Three elements must be taken into account. First, changes in oil and gas prices. Second, the ability to find and produce oil and gas. Thirdly changes in extraction costs, production and refining.

Not only did oil prices fall 50% in the second half of 2014, but most discoveries of new fields were at their lowest since 1995. The oil and gas groups must imperatively integrate the geopolitical factors, the risk of conflict, climate change and exchange rates. Shareholder majors should be prepared for less comfortable returns. ENI, the Italian oil group was the first to announce a reduction in its dividend this year. Will the American majors also be forced to follow this path?