Dividends from Oil Majors Back to Growth

Dividends from oil majors back to growth

Monday, June 11th 2018

The recovery in the oil price, stronger free cash flow generation and improved balance sheet are expected to boost oil payouts by 7%

• After reaching $80/bbl we expect the oil price to stabilize to $75 by end of 2019

• American oil majors to raise their dividends by 5% in the next 3 years

• Shell and BP to lag the sector (flat DPS) in the short term due to higher leverage

• Short-term boost projected for continental European oil majors (+4%) while we see a bright outlook for Russian oil companies with double digit growth Dividend growth returned to positive territory in FY17 (+6%) after two years of decline in FY15 and FY16, and we expect that trend to continue. We are forecasting an increase of 7% in FY18, followed by growth of 4% in FY19 and FY20. Among the companies we analysed there are disparities; whilst we expect double-digit growth from Rosneft and Lukoil, we think that BP and Shell are likely to lag the sector by paying flat dividends this year. American and continental European oil majors are anticipated to post steady increases (c.5%).

Aggregate payout* ($bn) Crude oil prices to 2019 (nominal $/bbl) 80 76 120 70 73 70 65 100 64 61 61 60 80

50 60

40 40

30 20

20 0 10

0 FY14 FY15 FY16 FY17 FY18e FY19e FY20e Dated Brent (North Sea) West Texas Intermediate (WTI)

*Exxon Mobil, Chevron, Conoco Phillips, Shell, BP, Total, Eni, Repsol, Equinor (ex-Statoil), Lukoil, Rosneft Source: IHS Markit, Factset

The significant increase in the oil price since the beginning of the year, the reduction of capex in the past few years and the focus to generate enough free cash flow to sustain the leverage and the dividend has led to an improvement in the financial ratios. For the first time since 2014, the dividend is expected to be covered by free cash flow for all the companies analysed. Payout ratios are also projected to come back to a more normalized level with a level of 58% in FY18 vs. 85% in FY17. Shell, BP and Eni are anticipated to remain at a high level (above 70%) in FY18. On the leverage side, the median gearing among the sector is expected to fall from 25% in FY17 to 17% in FY18. Analysis from the Energy division at IHS Markit is supportive of this positive outlook. Geopolitics have tightened market balances, leading us to raise our near-term price expectations. The US have re-imposed sanctions on Iran which are projected to reduce Iran’s oil exports. We also lowered our outlook for Venezuelan crude production. Additionally, global inventories have been declining rapidly since early 2017. We expect this trend will continue through the third quarter of 2018, further adding to upward price pressure. Given the geopolitical developments roiling oil markets, we now predict the price of Dated Brent will average $77/barrel in 2018 and $75/barrel in 2019.

Overview of the oil sector

DPS DPS Payout FCF est. FCF FY18e Gearing Yield estimate Growth ratio $Bn cover

Exxon Mobil $3.23 5.6% 65% 19.5 1.4 15% 4.0%

Chevron $4.48 3.7% 58% 15.8 1.7 14% 3.7%

ConocoPhillips $1.14 7.5% 29% 4.9 3.9 26% 1.7%

Shell $1.88 0.0% 67% 24.0 1.4 22% 4.8%

BP $0.40 0.0% 76% 11.7 1.5 27% 5.2%

Total €2.56 3.2% 57% 9.9 1.3 15% 4.9%

Eni €0.83 3.7% 75% 5.4 1.6 17% 5.4%

Repsol €0.95 7.0% 61% 2.2 2.4 12% 5.8%

Equinor $0.92 3.3% 52% 6.4 2.7 25% 3.5%

Lukoil RUB 3.83 10.2% 30% 6.0 1.9 3% 5.5%

Rosneft RUB 25.00 138.5% 41% 8.1 2.7 47% 6.5%

Median 3.7% 58% 8.1 1.7 17% 4.9%

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Dividend YoY Change 20% 15% 10% 5% 0%

FY17 FY18e FY19e FY20e

Exxon Conoco YTD Revision Chevron Shell BP Total Eni Repsol Equinor Lukoil Rosneft Mobil Phillips

FY18 EPS 20% 48% 145% 30% 31% 19% 49% 11% 49% 38% 34%

FY19 EPS 19% 36% 69% 27% 19% 20% 49% 5% 46% 17% 43%

FY18 FCF 41% 21% 51% 4% 40% 14% 12% 85% 110% 28% 103%

FY19 FCF 14% 56% 50% 11% 23% 29% 8% -13% 70% 37% 230%

FY18 DPS 2% 3% -2% 0% 0% 2% 19% 13% 5% -5% 9%

FY19 DPS 5% 4% -5% 0% 2% 6% 4% 19% 7% -5% 11%

Price change -2% -1% 24% 6% 10% 15% 13% 16% 23% 28% 31% Source: FactSet, IHS Markit

Cash flow statement of the sector ($million)

300,000

250,000

200,000

150,000

100,000

50,000

0 FY14 FY15 FY16 FY17 FY18e FY19e FY20e -50,000

CFO USD CAPEX USD FCF USD

Source: FactSet

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Scrip dividend option

Scrip 2018 2019 Comments Forecast In February 2018, the management reiterated its preference to maintain the scrip option. During the FY17 results conference call, they said “About 45% of our shareholders will take a scrip uptake. So right now, there BP YES YES is no intent to cancel. We do understand though, that there's a friction cost associated with issuing shares and those shares then being repurchased. We think that's worth it, given, our shareholders want it.” Total intends to maintain the scrip dividend option, with no discount on the price, since certain shareholders prefer Total YES YES to take their dividend in shares. Total intends to buy back the newly issued share with the intention to cancel them. Thus, no dilution linked to the scrip dividend from 2018. Recently, it confirmed that it will keep distributing dividend under the scrip option program in FY18 and FY19. Repsol YES YES The company also disclosed that it will continue with the share buybacks in order to offset the dilution effect of the scrip payments. American oil majors to raise their dividends by 5% in the next 3 years

Exxon Mobil FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS $2.70 $2.88 $2.98 $3.06 $3.23 $3.43 $3.63 Payout ratio 39% 75% 126% 85% 65% 65% 69% FCF cover 1.1 0.3 0.5 1.1 1.4 0.9 0.7 Gearing 12% 17% 19% 17% 15% 14% 13%

IHS Markit expects Exxon Mobil (XOM) to increase its quarterly dividend by 6% to $0.87 in Q2 FY’19. The company has steadfastly increased the dividend throughout the recent oil crisis despite the decline in its earnings, unlike some of its competitors; increased the dividend an average of 7% even though earnings declined by 11% FY’14-’16. However, now that oil prices are picking back up, the company’s management has not given any indications that it plans to significantly increase shareholder return, beyond its current levels, nor to switch the frequency of increases (we expect increases to occur only in Q2 June payment). Management hinted at its plans in its recent earnings’ call by stating that although the company’s fundamentals have improved, it’s not yet planning to resume its buyback program beyond its usual dilution offsetting done in the first quarter and will continue to ‘reliably grow’ the dividend. The company’s fundamentals are expected to continue improving; EPS is projected to grow 30% in FY18 and an average of 4% in the next four years. Additionally, gearing ratio is projected to fall to the level of 2014. Free cash flow is also expected to broadly cover our DPS projections.

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Chevron FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS $4.21 $4.28 $4.29 $4.32 $4.48 $4.64 $4.72 Payout ratio 42% 150% 402% 117% 57% 56% 54% FCF cover -0.4 -1.2 -0.6 0.9 1.7 2.0 2.2 Gearing 9% 15% 21% 19% 14% 12% 9%

IHS Markit expects Chevron Corporation (CVX) to increase its dividend by 4% to $1.16 in Q1 FY’19. The frequency of increases has differed recently as the company tries to maintain its history of increasing its dividend payments on an annual basis despite tight resources hence the slight deviation from its usual Q2 dividend increases. However, though the dividend is a priority and oil prices are finally going up, we do not think the company will increase the dividend again in FY’18. In order to deliver on its commitment to the dividend, CVX has to contend with near- term debt maturities; the company has more than $14bn due in the next three years and spent approximately $11.5bn on debt repayment in FY’17. Additionally, the company currently spends a little more than $2bn on dividends every quarter and for it to significantly raise the dividend; the price of oil will have to be higher than it currently is as well as it is coinciding with a bigger demand for oil to justify such an increase. Lastly, we expect CVX to show its confidence in rebounded prices by reinstating the buyback program, but management has recently poured cold water on that saying that it does not expect a restart until it sees that all its other priorities, the dividend and debt, are covered as they stand.

ConocoPhillips FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS $2.84 $2.94 $1.00 $1.06 $1.14 $1.22 $1.30 Payout ratio 54% N/A N/A 177% 29% 31% 34% FCF cover -0.1 -0.7 -0.4 1.9 3.9 3.6 3.6 Gearing 25% 36% 40% 27% 26% 21% 16%

We expect ConocoPhillips (COP) to increase its quarterly dividend to $0.305 in Q1 FY19 after it resumed dividend growth in FY17. The company’s revised priorities are: maintain the lower dividend, target annual real dividend growth, reduce debt as it matures and target 20-30% of CFO for total shareholder payout. Management plans to bring down its debt to below $15bn by 2019 and has stated plans to further reduce it by $3bn in 2018 using cash windfall from the tax reform. Additionally, the company intends to grow the dividend annually and the total shareholder return as its cash grows. Management has previously stated a preference for buybacks due to their flexibility, but we expect more parity between the former and dividends as the oil prices increase on a more consistent basis and cash levels grow.

Shell and BP to lag the sector in the short term due to higher leverage

Shell FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS $1.88 $1.88 $1.88 $1.88 $1.88 $1.88 $1.88 Payout ratio 53% 111% 204% 98% 67% 63% 61% FCF cover 1.0 0.2 -0.3 0.8 1.5 1.6 1.1 Gearing 12% 14% 28% 25% 21% 20% 20%

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We expect a maintained payout from Shell in the medium term in a context of stabilisation of oil prices above $70 in the past weeks. The company has also recently stopped the scrip option meaning more cash outflow will be expected with a flat DPS. At Q1 2018 stage, the management reiterated its priorities with first debt reduction (gearing target of 20%), then dividend, followed by capital investment of no more than the low end of the $25 billion to $30 billion range and then initiating the share buyback program. In Q1 2018, adjusted CCS earnings increased by 41% (mainly driven by higher contributions from Integrated Gas and Upstream, partly offset by lower earnings in Downstream) and cash flow from operations was flat at $9.5bn. Free cash flow was flat at $5.2bn. Gearing ratio decreased from 25% to 24.7%. Shell expects to generate an annual organic free cash flow of $30bn by 2020 (oil price of $60).

BP FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS $0.40 $0.40 $0.40 $0.40 $0.40 $0.41 $0.42 Payout ratio 60% 124% 290% 128% 76% 75% 72% FCF cover 1.4 0.1 -0.8 0.3 1.5 1.6 2.3 Gearing 14% 19% 25% 26% 27% 23% 22%

BP is likely to hold the payout flat in FY18, but we project a 2.5% rise from Q1 2019 as there has been a stabilisation of oil prices above $70 (breakeven price to be c.$50 per barrel on a full dividend basis in 2018 reducing steadily to $35 to $40 per barrel by 2021). During the Q1 2018 conference call, the management said that going into the second half of the year, if debt levels come down, the company's board is likely to look again at the question of raising the dividend. In Q1 2018, underlying profit hiked by 71%, mainly due to higher profits in Upstream, partially offset by a higher tax charge. Gearing increased from 27.4% to 28.1%, following increases in working capital and higher Gulf of Mexico oil spill payments in the quarter. Including amounts related to the Gulf of Mexico oil spill, operating cash flow increased by 71% to $3.6bn. BP targets a gearing ratio range of 20% to 30%.

Short-term boost projected for continental European oil majors

Total FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS € 2.44 € 2.44 € 2.45 € 2.48 € 2.56 € 2.64 € 2.72 Payout ratio 52% 59% 77% 74% 58% 56% 57% FCF cover 0.0 -0.4 -0.1 1.3 1.3 1.5 1.0 Gearing 24% 23% 22% 12% 15% 13% 12%

Total aims to increase its dividend by 10% over the next 3 years to reach €2.72 per share in 2020. Total also intends to buy back newly issued shares as part of the scrip dividend option, to avoid dilution, and offers to buy back up to $5bn in shares over the period 2018-20 to share with investors the benefits of the oil price upside. In 2017 operating cash flow increased 35% to $22.3bn. Total expects start-up of cash-accretive projects and full contribution of new assets (mainly Maersk Oil) to fuel growth in cash flow in FY18. For FY18, Operating cash flow are expected by the consensus to reach $24.9bn. At Q1 2018, Total also confirmed CAPEX of $15-17bn in 2018. In FY18, Free cash flow are expected by the consensus to increase 30% and cover the dividend for

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FY18 by 1.3x. The balance sheet remains strong despite increase in gearing from 12% at end of 2017 to 15.1% at Q1 2018, and Total continue to target a gearing below 20%.

Eni FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS € 1.12 € 0.80 € 0.80 € 0.80 € 0.83 € 0.83 € 0.83 Payout ratio 109% 857% - 119% 75% 68% 68% FCF cover 1.1 0.2 -0.5 0.6 1.6 1.9 - Gearing 15% 20% 19% 17% 17% 15% 13%

In line with the guidance stated, we foresee Eni to increase its FY18 dividend by 4% YoY. On the Strategic Plan for 2018-2021, the company announced the aforementioned policy against the FY18. It also disclosed its restated dividend cash neutrality from the previous $57/bbl to $55/bbl and CAPEX cash neutrality at $40/bbl. At the latest earnings call, Eni disclosed its guidance for the current year, in which it expects to boost by 3% the production on the upstream business and CAPEX at around €8bn. According to FY17 results, Cash Flow from Operations grew by 25% LFL to amount €10b, gearing stood at 17% and net profit recorded was €3.37b compared to net loss of nearly €1bn the previous year. It also was able to reduce the net debt level from €12.6b in FY16 to €9.7b in FY17.

Repsol FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS € 0.85 € 0.70 € 0.75 € 0.89 € 0.95 € 1.00 € 1.00 Payout ratio 69% 54% 65% 66% 60% 64% 62% FCF cover 0.0 1.3 1.2 1.7 2.4 1.0 1.4 Gearing 23% 39% 32% 30% 12% 10% 9%

Days ago, Repsol published its revised guidance on its strategic plan in which announced a dividend of €0.95 for FY18 and €1 for FY19. The company also announced that it will maintain the scrip option program throughout the life of the strategic plan, i.e. at least until FY19. We do not forecast any change on the scrip option program, since it’s following the steps of some other major competitors like Total by being flexing with the scrip instalments while keeping full share buybacks to offset the dilution effect. During the last three years, Repsol has been involved in a deleveraging process in which it was able to reduce the net debt position by more than 60%, supported by the sale of the 20% stake in Gas Natural. In FY17, Repsol recorded 25 % LFL net profit growth and updated its Cash Flow breakeven at $50/bbl to cover the dividend outflows.

Equinor FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS $1.02 $0.88 $0.88 $0.89 $0.92 $0.94 $0.98 Payout ratio 62% 126% - 64% 52% 50% 52% FCF cover 0.2 -0.7 -1.1 1.2 2.7 2.2 2.1 Gearing 18% 25% 34% 28% 25% 20% 15%

We expect a dividend of $0.92 from Equinor, up 3.5%. Equinor is expected to remain committed to the dividend policy of increasing the dividend in line with long-term

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underlying earnings. Equinor has ended its two-year scrip programme as planned. The company also see an emerging scope for share buy-backs, dependent on macro outlook and portfolio developments. However, the near-term priority is to strengthen the balance sheet. Our projection reflects a payout ratio of c.50% (dividend yield of 3.5%). For the period 2017 – 2020, production growth is expected to be around 3-4% CAGR. Production for 2018 is estimated to be 1-2% above the 2017 level. In Q1 2018, net operating income increased by 17%, primarily due to higher liquids and gas prices and increased volumes of liquids sold, partially offset higher operational costs. Like for other oil companies, the projected decrease in gearing ratio and solid free cash flow cover supports our confidence for the dividend growth.

Bright outlook for Russian oil companies with double digit growth

Lukoil FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS (RUB) 154 177 195 215 237 261 288 Payout ratio 41% 28% 75% 39% 30% 39% 45% FCF cover 0.5 1.6 1.5 1.4 1.9 2.2 2.0 Gearing 16% 16% 12% 8% 3% -3% -10%

We expect Lukoil to continue raising dividends by 10% per year based on 2016 and 2017 payments. The company distributes dividend twice a year, from the first nine months and the whole year results. In the past year net debt has decreased by a third and is expected to go further down to RUB 100 million by the end of 2018. The dividends have been fully covered by free cash flow for the past 3 years while the company manages stable progressive dividend policy (the dividends have been growing for the past 20 years). The policy guarantees an annual increase at least by inflation rate.

Rosneft FY14 FY15 FY16 FY17 FY18e FY19e FY20e DPS (RUB) 8.21 11.75 5.98 10.48 25.00 31.00 38.00 Payout ratio 25% 28% 35% 50% 41% 41% 50% FCF cover 11.7 11.8 -2.7 -7.1 2.7 2.5 2.3 Gearing 51% 47% 42% 49% 47% 44% 41%

New Rosneft dividend policy targets payout ratio of at least 50% of net income under IFRS and dividend distribution of at least twice a year (historically 35:65). Free cash flow is expected to accumulate to positive level for the first time in three years to fully cover projected dividends going forward. Russian state is the majority shareholder and has guided Rosneft to allocate half of the profits for the government budget, so there is a high level of confidence in the minimum aggregate dividend amount.

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Appendix

Payout ratio FY14 FY15 FY16 FY17 FY18e FY19e FY20e Exxon Mobil 39% 75% 126% 85% 65% 65% 69% Chevron 42% 150% 402% 117% 57% 56% 54% ConocoPhillips 54% - - 177% 29% 31% 34% Shell 53% 111% 204% 98% 67% 63% 61% BP 60% 124% 290% 128% 76% 75% 72% Total 52% 59% 77% 74% 58% 56% 57% Eni 109% 857% - 119% 75% 68% 68% Repsol 69% 54% 65% 66% 60% 64% 62% Equinor 62% 126% - 64% 52% 50% 52% Lukoil 41% 28% 75% 39% 30% 39% 45% Rosneft 25% 28% 35% 50% 41% 41% 50% Median 53% 93% 102% 85% 58% 56% 57% FCF cover FY14 FY15 FY16 FY17 FY18e FY19e FY20e Exxon Mobil 1.1 0.3 0.5 1.1 1.4 0.9 0.7 Chevron -0.4 -1.2 -0.6 0.9 1.7 2.0 2.2 ConocoPhillips -0.1 -0.7 -0.4 1.9 3.9 3.6 3.6 Shell 1.0 0.2 -0.3 0.8 1.5 1.6 1.1 BP 1.4 0.1 -0.8 0.3 1.5 1.6 2.3 Total 0.0 -0.4 -0.1 1.3 1.3 1.5 1.0 Eni 1.1 0.2 -0.5 0.6 1.6 1.9 - Repsol 0.0 1.3 1.2 1.7 2.4 1.0 1.4 Equinor 0.2 -0.7 -1.1 1.2 2.7 2.2 2.1 Lukoil 0.5 1.6 1.5 1.4 1.9 2.2 2.0 Rosneft 11.7 11.8 -2.7 -7.1 2.7 2.5 2.3 Median 0.5 0.2 -0.4 1.1 1.7 1.9 2.1 Gearing ratio FY14 FY15 FY16 FY17 FY18e FY19e FY20e Exxon Mobil 12% 17% 19% 17% 15% 14% 13% Chevron 9% 15% 21% 19% 14% 12% 9% ConocoPhillips 25% 36% 40% 27% 26% 21% 16% Shell 12% 14% 28% 25% 21% 20% 20% BP 14% 19% 25% 26% 27% 23% 22% Total 24% 23% 22% 12% 15% 13% 12% Eni 15% 20% 19% 17% 17% 15% 13% Repsol 23% 39% 32% 30% 12% 10% 9% Equinor 18% 25% 34% 28% 25% 20% 15% Lukoil 16% 16% 12% 8% 3% -3% -10% Rosneft 51% 47% 42% 49% 47% 44% 41% Median 16% 20% 25% 25% 17% 15% 13%

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Contacts:

Jonathan Chatelain +44 20 7064 6021

Carlos Garcia-Lastra Marques +44 207 786 5162

Anna Beletskaya +44 207 260 2251

Pawan Shekhar +91 120 611 8791

Amira Abdulkadir +1 6466793135

Kevin Soyer +44 20 7064 6491 [email protected]

For further information, please visit www.ihsmarkit.com

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