Of all the things that cango wrong forinvestors in oil exploration and production stocks such as Tullow Oil (LSE: TLW), losing your dividend is the least of them.
Most of usare looking for a thrilling blast ofcapital growth, rather than the steady trickle of a solid income stream. If you were afteroildividends, you would have investedin FTSE 100majors such asBPandRoyal Dutch Shell.
Thats why I am relatively sanguine about todays news that Tullow Oil is dropping its dividend, because who invested in Tullow for the yield anyway?
Dividend Down
Following todaysdecision to scrap its final dividend, investors in Tallow will inevitably be disappointed to pocketjust 4p per share instead of the12p they got in 2013.
But they will be more concerned bythe 50% drop in the share price overthe past 12months (and 70% overthree years).
Against that, the loss of 2.96% yield is small change.
Putting It Crudely
The big worry isnt the dividend itself, but the reasons for cutting it. Like every oil stock, Tullow has been roiled by collapsing crude.
And that wasnt all. It also suffered$729m worth of impairment charges and $1.66bn of exploration write-offs, which contributed to the $2.05bn full-year loss.
That is clearly a disappointment when set against Tullows $313m profit in 2013, although markets were warned, with management previously announcing a 16% decline in revenues to $2.21bn.
Low investor expectations partly explain why the stock fell less than 2% on the news. As did the fact that management seems to have a plan.
Happy Hedge
Chief executive Aidan Heavey inevitably pleaded the falling oil price, which made 2014 a difficult year across the industry.
He then announced planned cash savings of $500m over the next three years, by cutting capital expenditure, operating costs and administrative expenses.
Tullow has reset its business tofocus its capital expenditure on high-quality, low-cost oil production in West Africa.
Careful use of hedging also protected revenues, with Tullow achieving a full-year average price of $97.50 a barrel, comfortably above todays market average of around $56.
For even greater comfort, 60% of its 2015 entitlement oil sales are currently hedged with an average floor price of $86.Further hedges already in place for 2016, 2017 and 2018.
Dropping the final year dividend looks a sound move, given the pressures. Few investors will be complaining about that, as Tullow has protected itself against events that are largely beyond its control.
Its the share price that counts. And today, it looks cheap. Now lets see what Tullow can do to revive that.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
