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Big Oil: How Safe Are The Dividends?

Income-focused investors with a low-risk tolerance have historically looked too big oil to meet their income demands. However, the collapse in oil prices over the past 12 months has sharply reduced earnings and cash flow across the sector. Capex budgets have been slashed, cost reductions have been demanded of oil service providers and staff numbers have been reduced across the sector.

If oil prices remain depressed (as many forecasts are predicting) deeper cuts to spending can be expected. But what about dividends? Few oil companies have cut or frozen their dividends during the past year (Eni is the notable exception), and some have even increased their payouts to shareholders.

For the most part, oil and gas companies are currently funding their dividends through additional borrowing, but that cannot be sustained indefinitely. Indeed, according to Oppenheimer Holdings Inc. (NYSE:OPY), unless oil prices rebound meaningfully in the next 6-12 months, the probability...