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Oil investors to strike rich dividends, says Walker

Invesco's Martin Walker believes oil majors will start to increase payouts after building cash piles.

Oil investors to strike rich dividends, says Walker

The share prices of the oil majors have failed to keep pace with the rallying commodity but Invesco’s Martin Walker believes investors are in line for increased income payouts.

Walker, manager of the £141 million Invesco UK Equity fund, said the oil sector had made a ‘remarkable’ recovery since the lows of two years ago, partly due to rising oil prices but more broadly because of ‘some serious capital discipline’.

Cost cutting and driving capital efficiencies to cope with $50 a barrel oil prices rather than $100 have kept oil companies on course but share prices have continued to lag.

As part of these savings drives, BP (BP) has nearly halved the workforce in its its upstream business, which finds and produces oil,  and has made technological advances to reduce costs.

Royal Dutch Shell (RDSb) has cut the cost of its deep-water platforms to around a third of its original plans.

Walker added that Shell, BP and Total (TOTF.PA), all of which feature in Walker's portfolio, had worked together to standardise the equipment they use, meaning it is cheaper to work on projects together.

‘Prior to the price collapse, the exploration mantra was always to maximise production through specialisation of assets through bespoke and elegant engineering,’ he said. ‘In the new world, this approach has been replaced by a focus on standardised design to derive the lowest possible break-even price of production.’

This capital discipline means there is more money left over to pay dividends to shareholders and Walker argued that the increase diversification within the companies would allow the oil giants to continue to pay out when markets are tough.

‘The oil majors have diversified, asset-rich balance sheets which equip them to not only sail through market lulls, but also to realise cash when required,’ he said.

He added that all of the businesses were now focusing on free cashflow as the metric to manage.

‘Dividends are now well supported by cashflow, scrip dividends are being neutralised by share buybacks, dividend cover is being rebuilt and it is near inevitable that at some point the businesses will start to think about growing the dividend payout,’ he said.

The oil sector is not without its challenges, namely the increased use of shale that will continue to limit oil prices. Walker (pictured) said none of the businesses were modelling on a crude oil price much above $50 a barrel. Brent crude is currently trading at $71 a barrel.

‘Management teams all see further supply growth coming on stream from US shale to varying degrees,’ he said.

‘For some, supply growth will at best match demand due to limited spare capacity elsewhere in the world.’

However, Walker said it was important to look at demand in the context of exploration spend. He expects to see ‘a lagged impact of market weakness on production in the coming years and declining project rates are already symptomatic of this trend’.

2 comments so far. Why not have your say?

Paul Hutchings

Apr 11, 2018 at 13:06

Bring it on I say, I'm invested in al the above !!

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Anthony Tinslay

Apr 11, 2018 at 18:43

Great, but if we live long enough the Oil must run out and we will have another method of power production for the car. Must leave a note for my grandchildren but in the meantime "make hay whilst the sun shines "" and I shall watch my ever generous Shell Dividends pay for the vacations

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