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US earning season: Will oil majors have room to pay dividends now the price war is over?

Crude prices are struggling to find their level this week after a historic agreement to cut to global production and ahead of major oil producers announcing first-quarter earnings. As the price war between Saudi Arabia and Russia ends, Exxon, Chevron and ConocoPhillips shares edging up 0.5%, 0.5% and 0.3% in respectively pre-market trading on Thursday.

Brent crude was down 19 cents, or 0.7%, at $27.50 a barrel in morning trading, while West Texas Intermediary was up 7 cents, or 0.4%, at $19.94.

The weekend deal to cut output by 9.7 million barrels per day, or 10% of world output, will begin by the start of next month and extends to the end of June. The move comes as coronavirus stalls global economic activity slashing the demand for oil. Global crude demand has fallen 30% so far this month.

Exxon Mobil is working on plans to cut costs, pending an announcement on whether dividends will be cut for the first time in decades. Investors are awaiting a similar update from Chevron.

Both companies have clean balance sheets with net debt-to-capital ratios of in the 10% to 11% range. Cutting the dividend would discourage investors, especially since Exxon has increased its dividend each year for the last 37 years, and Chevron’s streak is almost as long.

US earning season: Will...

Ahead of the companies’ earnings reports this month, Exxon is “looking to significantly reduce spending” in the near term as it struggles with the fallout from the health emergency and a steep commodity-price decrease. Exxon stock is off about 55% from a 52-week high of $83.38.

US earning season: Will...

Both Exxon and Chevron are expected to slash their 2020 capital spending budgets as they slow the development pace of longer-term projects. Preserving cash has become a key priority during this downturn.

Goldman analysts rate Exxon a sell, and continue with their long-standing preference, shared by many analysts, prefer Chevron over Exxon.

Chevron, ConocoPhillips and Suncor Energy are expected to perform better due to their large caps and strong balance sheets that will allow them to get to the other side of the Opec/demand-driven downcycle in a position of strength, said Goldman analysts.

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Galina Mikova

Galina is a Hubspot-certified Technical Writer with over 10 years of experience in working with Fortune 500, private investment, banking, FOREX and niche tech companies as well as crypto and blockchain startups. She has a solid background in FinTech and blockchain technology.