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Crude collapse pressures Big Oil's fat dividends

One company’s oil and gas is the same as any other's, and there’s more of it than the world’s demanding at the moment. Even longer term, growth in petroleum demand is running at only half the rate of world GDP. And the president just unveiled a new environmental plan to squeeze the industry further.

But one thing that big energy companies do offer that is relatively scarce is generous cash dividend yields on their stocks.

As the shares of the integrated energy majors have been blasted along with sinking crude-oil prices, their dividend yields have been lifted far above prevailing market yields.

After Monday’s 4% drop in crude oil pushed the large-cap energy stocks, as tracked by the Energy Select Sector SPDR ETF (XLE), to a new 52-week low, Exxon Mobil’s (XOM) dividend yield had climbed to 3.7%, Chevron’s (CVX) hit 4.7% and Conoco Philips’ (COP) reached 5.7%. In a broad stock market with a 2% yield and the 10-year Treasury rate sliding below 2.2%, Big Oil is increasingly an outlier.

The fat yield premium on bellwether energy stocks reflects the market’s assessment that these companies are under heavy and increasing pressure to maintain their heavy cash payouts.

This is not to say that the companies’ dividends are in any immediate danger of being cut. But weak oil-and-gas prices and declining cash flows mean that the companies will have to continue maneuvering to maintain their payouts, perhaps in ways that jeopardize the long-term value of their businesses.

Executives at Exxon, Chevron, Conoco and their peers take their dividend policies quite seriously, recognizing that their shareholder ranks are largely individual income-seeking investors.

Exxon has paid a dividend for over a century, and has increased it more than 30 years straight. Royal Dutch Shell (RDSA.L) hasn’t cut its dividend since 1945.

But in order to keep cutting those checks to investors, the big guys need to rely at least in part on reduced capital spending budgets, asset sales and new debt.

In the first half of the year, for example, Chevron paid out $4 billion in dividends, as promised – on top of $15.2 billion in capital spending to maintain production levels. Funding that $19.2 billion outlays was $9.5 billion in cash flow from operations, nearly $5 billion in asset sales and $4.1 billion in net new debt, along with some existing cash.

And, of course, these companies have had to ease up on stock buybacks to preserve cash – just as their stock prices are getting cheaper and on paper becoming a better buy.

Chevron has ceased its buyback plan. Exxon spent $13.1 billion in 2014 on share repurchases with its stock trading between $90 and $103. It’s now halved its buyback pace, with the stock under $80.

And as these companies trim capex budgets and sell assets, their difficulties in finding new supplies and meeting production targets will only suffer.

That’s why the market is unwilling to pay up for the stocks despite these yields. It’s never a great sign when big companies have yields way above the average in an income-starved market.

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Still, if the commodity prices stabilize for an extended stretch of time, investors should be able to assess exactly what the path of cash flows and earnings might look like.

Big Oils won’t deliver the most dramatic returns from a rebound in crude oil, should we get one soon. But they’ll find their footing, and perhaps implied concerns over the long-term reliability of their cash payouts will ease.

For now, any buyer of the stocks for the income better be happy with clipping those quarterly coupons alone while they last, and viewing any boost in their share prices as a windfall profit.