After the bloodbath caused by Saudi Arabia’s decision to ramp up output, European oil companies at first blush look enticingly cheap.
The Johan Sverdrup oil field in the North Sea, west of Stavanger, Norway, Getty Images
The dividend yield in BP, for example, is a mouth-watering 9.35%, according to FactSet Research. For perspective, the yield on a British 10-year gilt is 0.27%.
But with oil prices so low, how could BP possibly afford to pay such a dividend?
In a note to clients with little in the way of commentary, Morgan Stanley ran the numbers on what European major oil companies would look like with Brent crude at $35 a barrel.
Probably the most jarring numbers are the dividend cover at that level.
Equinor this year could cover just 1% of its dividend versus its previous estimate of 93%, according to the Morgan Stanley calculation of life at $35 a barrel.
The best positioned is OMV, which can still cover 107% of its dividend at $35, down from an estimated 198%.
BP’s dividend cover falls to 54% from 107%; Shell’s drops to 72% from 115%; Total’s goes to 62% from 125%; Eni’s drops to 57% from 87%; Repsol’s falls to 79% from 123%; and Galp’s drops to 52% from 115%.
Stock buybacks for the European major oil companies would drop by two-thirds on the Morgan Stanley numbers.
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