The fourth-quarter numbers are rolling in, and things are looking great for oil and gas companies… considering the crash in oil prices.
But we must be careful…
The numbers are based on fourth-quarter production, and oil prices only began to crash hard in early December.
In other words, the current quarter’s numbers are going to be much,much lower. And in order to survive, companies are severely cutting spending.
That’s fine for now… But if prices stay low, major energy firms won’t have any qualms about taking the next step – sacrificing investors by cutting energy sector dividends to save their own skin!
Cutting to Save
We’re in the midst of what’s likely to be the most interesting earnings season in a decade for the oil and gas industry.
So far, earnings reports from the likes of Exxon (XOM), BP (BP), Schlumberger (SLB), and even smaller producers like Comstock Resources (CRK) have been higher than expected.
But in anticipation of low numbers for the next few quarters, many companies are already tightening their belts.
You see, if we experience a low-price environment for over a year, energy sector dividends will definitely start getting cut.
Fortunately, I do think prices will start to rise before the year is done. But before that happens, companies will adjust their spending to keep their earnings up in the meantime.
It’s a tried-and-tested strategy. Many companies can cut costs quickly and put off future spending by delaying projects that were on the table. Layoffs and rig cancellations are also picking up.
But there’s an upside for investors here…
Oil Austerity’s Silver Lining
Some companies – like BP and Chevron (CVX), for example – are already curtailing spending by billions of dollars, which is more than enough to cover dividends in the short term.
Now, while these tactics may be bad for employees and oil services companies, they are good for investors.
