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 Confidential | Copyright © 2018 IHS Markit Ltd Dividend Forecasting 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 $0.92 3.3% 52% 6.4 2.7 25% 3.5% Lukoil RUB 3.83 10.2% 30% 6.0 1.9 3% 5.5% Rosneft RUB 25.00 138.5% 41% 8.1 2.7 47% 6.5% Median 3.7% 58% 8.1 1.7 17% 4.9% | 2 Dividend Forecasting Dividend YoY Change 20% 15% 10% 5% 0% FY17 FY18e FY19e FY20e Exxon Conoco YTD Revision Chevron Shell BP Total Eni Repsol Equinor Lukoil Rosneft Mobil Phillips FY18 EPS 20% 48% 145% 30% 31% 19% 49% 11% 49% 38% 34% FY19 EPS 19% 36% 69% 27% 19% 20% 49% 5% 46% 17% 43% FY18 FCF 41% 21% 51% 4% 40% 14% 12% 85% 110% 28% 103% FY19 FCF 14% 56% 50% 11% 23% 29% 8% -13% 70% 37% 230% FY18 DPS 2% 3% -2% 0% 0% 2% 19% 13% 5% -5% 9% FY19 DPS 5% 4% -5% 0% 2% 6% 4% 19% 7% -5% 11% Price change -2% -1% 24% 6% 10% 15% 13% 16% 23% 28% 31% Source: FactSet, IHS Markit Cash flow statement of the sector ($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 | 3 Dividend Forecasting 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. | 4 Dividend Forecasting 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.