The Energy Select Sector SPDR (NYSEArca: XLE) and rival equity-based energy exchange traded funds have been significantly less bad this year, but amid slumping earnings for oil and natural gas producers, questions linger about the ability of these companies to maintain and grow dividends.
Bright spots have been few and far between for equity-based energy exchange traded funds this year and for all the struggles the encountered by the sector, it still is not inexpensive relative to the S&P 500. In fact, the energy patch is downright pricey compared to the broader market. This after a spate of spending cuts that have not been met with widespread enthusiasm among investors. [Oil ETF Dividends Appear Safe…Sort Of]
Investors will also be keeping a close eye on dividends, especially with oil prices at $30 per barrel. Oil CEOs have pledged to maintain their dividends, but with oil prices dipping to 13-year lows, traders are growing skittish.
Oppenheimer senior analyst Fadel Gheit “is anticipating Chevron to cut its dividend any day now, the company is likely to seek alternative solutions first. Chevron already stopped its share buyback program last year. In October, Chevron cut 6,000 to 7,000 jobs. The company also announced in December a capital budget cut of 24 percent for 2016,” reports CNBC.
By not raising its dividend last year, Chevron lost its dividend aristocrat status. Kinder Morgan (NYSE: KMI), another XLE holding, raised its payout several times last year only to announce to a significant dividend reduction late in the year.
Oil majors have tightened their belts, reducing costs by laying off thousands of workers and halted many new projects. Large integrated oil companies are expected to hold up better than drilling stocks as these giants have both upstream exploration and production, along with downstream refining operations.
“If we don’t have a price action on the upside, they’ll clearly have to dramatically reduce capital spending if they don’t want to borrow to pay that dividend,” CastleArk Management President and CIO Jerry Castellini told CNBC.
Energy Select Sector SPDR
