Falling oil prices have pushed ConocoPhillips’ (COP) dividend yield close to all-time highs. At 5.12%, its yield is almost higher than when the company hit a 5-year low during the financial crisis.
Still, the company has shown an ability to sustain dividend growth in the face of previous downturns. From 2008 to 2009, the company actually was able to raise its payment from $1.88 to $1.91. Will the most recent downturn be different, or is this yet another rare opportunity to snap up a very attractive and stable yield?
The Dividend is in Doubt With Current Oil Prices
ConocoPhillips has a strong list of projects with extraction costs of <$60 a barrel. However, the firm has stated in the past that its long-term budgets require ~$70 a barrel oil to break even on cash flows and support the dividend.
So while the company should continue to grow production and earnings with current oil prices of around $55, cash flows can eventually be expected to dry up, forcing a dividend cut.
For example, the company’s 2017 cash flow from operations projects is for $15.5 billion based on $70-75 oil prices. Its capital spending plan should be roughly $11.5 billion. With oil prices back to $50-55, ConocoPhillips can barely cover maintenance capex let alone a lofty dividend payment that costs the company $4 billion annually.
Bottom line: oil prices would need to rise if the dividend is to be counted on.
Can Oil Rise?
The current situation in Iran adds doubt that oil prices can rise substantially any time soon. The country expects to double oil exports once it regains access to the export markets. Another issue is that Iran might flood the markets with up to 40 million barrels on day one due to excess supplies in floating storage.
And while the domestic oil rig total is still down 922 rigs from the same time last year, operators started adding rigs back when oil rebounded to $60. This implies that many operators see $60 oil as enticing enough to start adding production again. This should help slow any major rise in oil prices.
Conclusion: Stay Away
While COP’s dividend is enticing, you can still get plenty of attractive yields from other majors such as ExxonMobil (XOM) and Chevron (CVX). While these companies also suffer from lower oil prices, they have a bit more financial flexibility and a lower cost of production. If you’re going to dip your toes into the oil and gas market for income, it looks best to stick with more conservatively positioned peers.
