With oil prices plummeting, investors may have reason for concern. This week, ConocoPhilip cut its dividend by two-thirds because of the drop in oil prices to $30/barrel. Its dividend went from 74 cents/share to 25 cents/share
And Conoco isn’t the only company whose dividends are in trouble because of cheap oil. In January, Noble Energy slashed dividend payout by 44%. Last year, Eni (E) in Italy also made a substantial dividend cut, as did pipeline company Kinder Morgan with a 75% cut in December. Investors are worried that big oil companies, such as Chevron (CVX) and ExxonMobil (XOM), may be next.
Such speculation wasn’t helped by the abrupt liquidation of a $600M leveraged fund bet on falling prices. According to Reuters, unknown investors in the VelocityShares 3x Inverse Crude Oil Exchange Traded Note left the fund after jumping in just last month. Over 1.8M shares of $602M were redeemed, which, according to FactSet Research data, is the largest ETN outflow over the past year. Credit Suisse (CS), the ETN’s issuer, was forced to repurchase short positions in quick measure.
Analysts say that the unwinding may have equated to about 40,000 futures contracts in a single day. The following day, oil prices did go up over 8% to 32.28/barrel.
The Wall Street Journal says that the collapse in oil price is causing havoc with investors with short-term bonds, as well as those involved in the futures market, high-yield corporate bonds, energy partnerships, and oil and gas company shares.
Last year, Citigroup (C), Bank of America Corp. Units (BAC), Credit Suisse Group AG, J.P. Morgan Chase & Co. (JPM), Goldman Sachs Group (GS), UBS Group AG (UBS), Morgan Stanley (MS), and other leading financial firms issued at least 300 structured notes of at least $1.3B with returns tied to energy-related assets, including oil. Investors included individual investors, rich families, financial advisers, and brokers seeking to limit risks or enhance returns on more traditional investments.
Maturation typically occurs at two years or sooner, with the opportunity to make significant money if oil prices go up. Then again, the reverse outcome can occur if oil prices go down.
In other oil-related news, a US judge told state-run Brazilian oil company Petrobas that it will have to face a class action lawsuit brought by investor seeking to get back billions of dollars in losses related to a political kickback and bribery scandal. The oil giant is accuse of inflating the value of over $98B of bonds and stocks with corruption.
US district judge Jed Rakoff certified the plaintiff classes. One class purchased Petrobas securities between 1/10 and 7/15, Union Asset Management Holding AG is the lead plaintiff. The other class involves those who purchased debt securities offerings in ’13 and ’14. The lead plaintiffs in that case are the Employees’ Retirement System of Hawaii and North Carolina’s treasurer.
Cheap Oil Chokes Energy Companies and Their Dividends, CNN, February 4, 2016
Petrobras faces class-action lawsuit in bribery and political kickbacks scandal, The Guardian, February 2, 2016