Energy companies continue to cut deeply into their 2020 spending plans to combat plunging demand for oil amid the COVID-19 outbreak and subsequent shutdown of much of the global economy. While many companies are working hard to preserve their dividends during this uncertain time, others are slashing or eliminating shareholder payouts to conserve cash.
Here's a look at the latest dividend casualties, which also hints at what companies might be next in line for a reduction.
Gouging out the payout
Companies across the energy sector have been reducing or eliminating their dividends this month. Last week, master limited partnership Enable Midstream Partners (NYSE:ENBL) slashed its distribution by 50%. That will save it $290 million per year, which will go toward debt reduction. That move had a direct impact on utility CenterPoint Energy (NYSE:CNP), which owns a 53.7% stake in Enable Midstream. With its MLP cutting its payout, CenterPoint will lose $155 million in annual cash flow. It also had to slash its dividend by 50% to reduce cash outflows.
Joining Enable Midstream and CenterPoint Energy in a 50% payout reduction was MLP Plains All American Partners (NASDAQ:PAA) and its general partner Plains GP Holdings (NASDAQ:PAGP). Plains All American, which is a leading oil pipeline operator, cut its payout in response to the reduction in oil volumes that will flow through its systems in the coming months because of lack of storage space and the associated decrease in fees. The company recently asked its customers to cut back on their production because it's running out of room at its terminals.
Meanwhile, oil producer Continental Resources (NYSE:CLR) suspended its quarterly dividend this week because of the weakness in oil demand from the COVID-19 outbreak. Continental just initiated a dividend last July following several years of allocating excess cash to repay debt. However, having had to slash its output by 30% for lack of demand, it had no choice but to press pause on dividend payments.
Expect more reductions to follow
The majority of the dividend reductions and eliminations in the energy sector have come from either independent oil and gas producers (i.e., those that don't operate refineries) or the midstream companies that focus on gathering and processing (G&P) this output. As such, investors should anticipate that more companies in those two subsectors of the oil market will make similar moves.
Topping the list of companies that will likely slash their payouts in the coming weeks are G&P-focused MLPs Western Midstream Partners (NYSE:WES) and Noble Midstream Partners (NASDAQ:NBLX). The market has already priced in steep cuts at both companies, given their eye-popping current yields of 45% for Western Midstream and 80% at Noble Midstream. With several peers having already slashed their payouts, it seems like only a matter of time before these companies make similar moves.
Meanwhile, the longer oil prices remain below $40 a barrel, the more likely additional producers will follow Continental and slash or suspend their dividends. Those at greatest risk are producers lacking top-tier balance sheets. Some names to watch are Cimarex Energy, Noble Energy, Marathon Oil, and Hess, which analysts at Morgan Stanley label as being at the highest risk for a credit-rating downgrade.
Another brutal period for income investors in the oil patch
Dividends had finally started making a comeback in the oil sector over the past couple of years following the market downturn in 2014, which forced many to slash or suspend their payouts. However, with crude prices crashing following the COVID-19 outbreak, companies in the sector have no choice but to cut spending to preserve cash. That trend will probaly continue as the industry does everything it can to stay afloat during these turbulent times.