• Royal Dutch Shell wrote down $16.8 billion in assets
  • BP, Total and Chevron recorded write-offs of $11.7 billion, $8.1 billion and $4.8 billion, respectively.
  • Since 2010, the five aforementioned supermajors have paid out $586 billion to shareholders in dividends

Dividends paid to shareholders by five of the largest oil companies in the world in the second quarter pushed these firms into precarious positions.

The Institute for Energy Economics & Financial Analysis, or IEEFA, reported that the so-called supermajors – ExxonMobil (XOM), Royal Dutch Shell (RDS-A), BP plc (BP), Chevron (CVX), and Total (TOT) – in the aggregate paid out $16.9 billion more to shareholders than they generated from their core business operations in the quarter. They compensated for this gap through borrowing and asset sales.

ExxonMobil, which was just kicked out of the Dow Jones Industrial Average after more than 90 years, incurred “sharply negative” free cash flows while conducting “massive borrowing” in order to sustain its shareholder dividends.

Exxon Mobil declared a cash dividend of 87 cents per share, the same level as in the prior quarter. But the company also reported a $1.1 billion second-quarter loss (its second straight quarterly loss) and warned of further spending cuts.

Exxon Mobil is estimated to pay out about $15 billion in annual dividends.

Royal Dutch Shell reported a second quarter loss of $18.3 billion, but still paid out an interim dividend of 16 cents per ordinary share.

BP posted a second quarter loss of $16.8 billion – and cut its dividend in half to 5.25 cents per share.

Total of France suffered an $8.4 billion loss in the second quarter but maintained its dividend at €0.66 (78 cents) per share.

Similarly, Chevron incurred an $8.3 billion loss in the second quarter, but nonetheless declared a quarterly dividend $1.29 per share

Some of the huge losses sustained by these oil giants included massive write-downs of assets – Royal Dutch Shell wrote down $16.8 billion in assets; BP, Total and Chevron recorded write-offs of $11.7 billion, $8.1 billion and $4.8 billion, respectively.

“It was a dismal quarter capping a disappointing decade for the global oil supermajors,” said Kathy Hipple, an IEEFA financial analyst.

IEEFA noted that oil companies’ woes predated the COVID-19 pandemic – indeed, since 2010, the five aforementioned supermajors have paid out $586 billion to shareholders in dividends, while generating only $343 billion in free cash flow.

“The supermajors have engaged in deficit spending for years,” said Clark Williams-Derry, director of energy finance at Sightline Institute. “But their performance last quarter was particularly dire.”

The five companies posted an aggregate $5.5 billion in negative free cash flows in the second quarter, dominated by the $4.4 billion in negative free cash flow from ExxonMobil.

Moreover, partly in order to pay their dividends, these firms borrowed substantially – boosting their cumulative debt by $50 billion to $290 billion quarter-over-quarter.

David Kass, clinical professor of finance at University of Maryland in College Park, Maryland., told International Business Times that large oil companies such as Exxon Mobil and Chevron are paying dividends in large part to provide support for their share prices.

“The current 8.5% dividend being paid by Exxon Mobil indicates that the market is expecting a dividend reduction,” Kass said. “Chevron's 6% dividend, likewise supporting its stock price, appears to be less vulnerable to a reduction.”

Kass added that the large oil companies are substantially cutting back on their capital expenditures to adjust to a world where demand for oil has plummeted as a result of the pandemic and associated lockdowns and reductions in economic activity.

“However, after a vaccine is widely available in 2021 -- as is anticipated by many observers -- demand for oil should gradually recover over time from a revival of travel and tourism along with demand from other industries,” Kass stated. “This recovery, however, will be somewhat muted by the anticipated rapid growth of alternative energy sources that are renewable and environmentally friendly to address issues relating to climate change and global warming.”