(Bloomberg) -- The first major oil companies to report earnings amid the worst oil crash since 2009 all pledged to protect shareholder payouts even as they announced more than $20 billion in spending cuts in a span of five hours.
By preserving and even increasing dividends, energy companies are attempting to keep investors on board while they wait for oil and natural gas prices to rebound to more profitable levels. Producers, meanwhile, are choosing to cut drilling programs and workforces to weather a downturn that could extend for years.
Royal Dutch Shell Plc, Occidental Petroleum Corp. and ConocoPhillips pledged to slash spending by almost $10 billion this year alone -- enough to drill more than 1,400 shale wells. The risk: cannibalizing budgets to feed cash to shareholders may leave companies with reserves too anemic to fuel future output, said Timothy Doubek, who helps manage $26 billion in corporate debt at Columbia Management Advisors.
“It’s a pretty impressive ax they’re taking to their drilling budgets, but when the stock is down 30 or 50 percent, what are they trying to protect by preserving dividends?” Doubek said in a telephone interview from Minneapolis. “You’re protecting a stock price that can’t be protected. Why don’t you keep as much cash as possible so you can be the first one to take advantage when assets go up for sale?”

Cash Outlay

Shell, Occidental and ConocoPhillips handed over more than $17 billion in dividends to shareholders last year, according to data compiled by Bloomberg. For the full year, Shell and ConocoPhillips paid out $11.8 billion and $3.5 billion, respectively. Occidental’s dividend bill for the first nine months of 2014 was $1.69 billion; the company hasn’t yet disclosed its fourth-quarter payout.
The scaled-down 2015 investment programs overshadowed a mixed bag of results the companies announced as they closed the books on the fourth quarter. “We see pressure on our investment program,” Shell Chief Executive Officer Ben van Beurden said on Bloomberg TV. “It’s a game of being prudent, but at the same time not overreacting.”
Crude oil fell below $44 a barrel in New York trading today, the lowest in almost six years, as rising U.S. production adds to oversupplies.
Statoil ASA, Tullow Oil Plc and Premier Oil Plc said they’ve delayed projects or cut exploration spending. BP Plc has frozen wages and Chevron Corp. delayed announcing its 2015 drilling budget so that it could reassess the market.

Protecting Returns

By cutting spending, companies aim to protect returns to energy investors who count on dividends as a safe haven from commodity price risks.
ConocoPhillips emphasized today it will protect its dividend above all else, even if it has to increase its dependence on debt. Additional borrowings might reduce the company’s credit rating, but not below investment grade levels, Chief Financial Officer Jeff Sheets said in an interview.
ConocoPhillips investors need to understand that the dividend is “part of their return they will get on our shares that they don’t have to be concerned is going down,” Sheets said. ’’The fact that you’ve committed to that level of payout is going to make you very disciplined about your level of capital investments as well.’’
Occidental today reported its first quarterly loss in more than a decade, and ConocoPhillips and Hess Corp. also saw their first three-month losses in years. Shell reported higher fourth-quarter earnings, but still fell short of analysts’ expectations.

Not Sustainable

The severe spending cuts aren’t a sustainable strategy for oil companies, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas. Producers must invest in new oil and gas wells for the future to replace dwindling production from older wells.
Shell’s van Beurden today warned that canceling or delaying too many projects could jeopardize supply over the longer term.
“They find themselves with the difficult choice of reducing spending or dividends,” Bullock said. “Many are choosing to continue paying shareholders, since investing more amid low prices would be seen as providing sub-par returns. Cutting dividends could bring a crushing response from investors.”
Some smaller companies are making that hard choice. Canadian Oil Sands Ltd. is likely to cut its dividend when it reports earnings later today, Menno Hulshof, an analyst with TD Securities Inc. in Calgary, said yesterday in a note to investors.

Holding Fast

Larger companies so far are holding fast.
“The dividend remains our top priority for capital allocation,” ConocoPhillips Chairman and Chief Executive Officer Ryan Lance said today in a conference call with investors today.
Shell plans to pay a first-quarter dividend of 47 cents a share, unchanged from the previous two quarters, the Hague-based company said in a statement today. The company, which plans to defer or cancel about 40 projects worldwide, will cut spending by $15 billion over three years to make it possible to keep paying shareholders, bringing total cuts announced today for all three companies to $20 billion.
“The dividend is an iconic item at Shell and I will do everything to protect it,” Van Beurden said.

Missing Estimates

Profit excluding one-time items and inventory changes was $3.3 billion in the quarter, up from $2.9 billion a year earlier, Shell said today. That missed the $4.1 billion average of 13 analyst estimates compiled by Bloomberg.
Shell’s American depositary receipts dropped 3 percent to $62.22 at 2:41 a.m. in New York.
“Shell widely missed expectations in upstream, particularly in the Americas, but performed well in downstream - - a key cushion for integrated oil companies in a declining crude price environment,” said Kim Fustier, an analyst at Edison Investment Research. Shell missing expectations by about 20 percent “doesn’t bode well for competitors.”
Occidental swung to a loss of $3.41 billion after the company wrote down the value of oil and gas fields it won’t drill until energy prices rise enough to make them profitable. Houston-based Occidental announced $2.9 billion in spending cuts.
ConocoPhillips, the third-largest U.S. energy producer, said it lost $39 million and announced $2 billion in additional spending cuts. The Houston-based company will spend $11.5 billion drilling wells from Colorado to Indonesia, a decline of almost a third from last year. Exxon Mobil Corp., the world’s largest oil company by market value, reports earnings on Monday.
The average price in the quarter for Brent crude, the benchmark used by most of the world, fell 30 percent from a year before to $77 a barrel. This month the benchmark extended its decline, touching $45.19 a barrel on Jan. 13.
To contact the reporters on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net; Joe Carroll in Chicago at jcarroll8@bloomberg.net
To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net Steven Frank