The steep decline in crude oil prices may put a halt to dividend payouts that regularly yield 10 percent or more from offshore drilling contractors including Transocean Ltd, analysts and investors said. Often seen as a last resort to conserve cash, companies typically are loathe to cut dividends. But the more than 50 percent slide in crude oil prices to under $50 a barrel has forced oil and gas companies slash spending on exploration.
“Where I see danger to the dividend is really going to be the offshore rig companies,” said Phil Weiss, chief investment analyst at Baltimore-Washington Financial Advisors. “Transocean is yielding 19 percent, I would expect that to be cut.” When asked, Transocean referred to its third-quarter earnings call, where it said it remained committed to a competitive dividend.
Typically, companies prefer to halt share their buyback programs if they need to retain cash because investors see it as a less drastic move than cutting a payout, analysts said. Transocean’s and Ensco’s annual dividend is $3 per share, while Noble’s payout is $1.50 per share.
Noble and Ensco’s payouts currently both yield about 10 percent. By contrast, onshore drilling contractor Helmerich & Payne has a dividend yield of about 4 percent. Rating service Moody’s said last week that it is putting Transocean’s investment-grade debt assessment on review for downgrade, citing the company’s looming capital commitments, including its dividend. “To remain investment grade they need to come up with a plan that can include a lot of different things and that doesn’t have to include a dividend cut, but that’s obviously a logical thing to do,” said Stuart Miller, an analyst with Moody’s Investors Service.
Transocean’s dividend has a higher likelihood of getting cut than those at Ensco or Noble Corp because both have a lower payout ratio than Transocean and fewer capital obligations, said Stewart Glickman, an analyst with S&P Capital IQ. A payout ratio is a measure of a company’s ability to cover dividends with earnings. Transocean’s dividend needs to be “eliminated or materially cut,” while Ensco’s payout is seen as the safest in the group, Angie Sedita, oilfield service analyst at UBS, said in a fourth-quarter earnings preview.
A Noble spokesman said the company most recently said it intends to sustain the dividend at the $1.50 per share level. Ensco did not comment on its dividend.