Thursday, February 4, 2016

ConocoPhillips Cuts Dividends - What Should a Dividend Investor Do?

ConocoPhillips (COP) just announced that it is cutting its quarterly dividend from 74 to 25 cents/share. This comes after management constantly reiterated that the dividend is a priority. Unfortunately, when a company is selling a commodity whose price can fluctuate greatly, and you have very high capital expenditure costs, they cannot really do much other than cut the dividend to conserve resources. This environment is tough on ConocoPhillips, because they are a pure exploration and production play, and have no downstream operations ( refining and marketing) like the big integrated companies such as Exxon Mobil (XOM) and Chevron (CVX). If ConocoPhillips still had Phillips 66 (PSX), it would have been able to weather the storm in oil prices a little easier.
It is also unfortunate that I was right to question the sustainability of the dividend payment from ConocoPhillips in my earlier assessments from 2015.

As I have said before, a dividend cut is an indication that my original thesis is incorrect. When faced with facts that I was wrong, I change my position and I sell. As a dividend growth investor, my goal is to live off the dividends generated from my portfolio in retirement. This is why I favor investing in companies that pay stable and rising dividends throughout the economic cycle. If a company proves me wrong by cutting dividends, this shows that this company is not exhibiting the qualities I look for in an investment.


The question I always get after selling is: “Where should I invest the proceeds from the sale”?
I am thinking of beefing up my position in Exxon Mobil (XOM), which in my opinion will be the one energy company whose dividend will be sustainable. The problem with this decision is that Exxon Mobil looks pricey right now – I would prefer to add to my position at yields around 4%.
The other problem is if we get dividend cuts from other oil majors such as BP (BP) and Royal Dutch Shell (RDS/B), adding to Exxon Mobil will result in an above average exposure in one company. The alternative for me would be to sell those stocks if dividends get cut, and invest the proceeds in an energy funds or ETF.

The rationale for this decision is to retain exposure to the energy sector, during the time of tumultuous dividend cuts. If I sell a stock at a loss, I get to reduce the taxes I pay. If I buy a basket of energy companies, I retain exposure to the energy sector, in case it ultimately rebounds. The funds I am considering include Vanguard Energy ETF (VDE) or Energy Select Sector SPDR (XLE).

The real question to ask of course is whether we are in a new normal, where oil prices stay between $20 - $30 barrel like they did between the 1980s and the early 2000s. If we are in a new normal situation for oil prices, and the whole commodity boom of 2002 – 2008 was just a fluke, then chances are that a lot of energy companies will be in serious trouble, because most of their projections are based on oil selling at two or three times what I may call “the new normal price”. We may see a lot of bankruptcies, consolidations, job losses and terrible spillover effects for entire countries and different industries that supply the tools to oil and gas companies.

Either way, selling ConocoPhillips will reduce my forward dividend income by less than 2%. Reinvesting the money from the stock sold will recover some of the dividend income, and the net impact on forward dividend income will be a loss of 1%. My portfolio allocation to oil majors before the sale was a little over 4% at this moment. It makes sense to retain allocation to the sector, even if all companies ultimately end up cutting dividends, which is where does funds could come in handy in addition to ExxonMobil and Chevron ( whose dividends look "safer" than most others, but not as safe as those of ExxonMobil).

It has been extremely interesting to observe this train wreck unfold in real time however. It looks like most investors and companies have been trying to pick a bottom in oil prices for the past year and half. I am beginning to understand the phrase “catching a falling knife is dangerous”. This of course means that few would have expected that we would have the major producers of oil be stuck in a prisoner’s dilemma where everyone is out for themselves, but ends up hurting their own people along with their competitors. I am of course referring to major oil producing countries which are continuing to pump out a lot of oil, despite low prices. The smart decision for everyone is to reduce production, and everyone will be earning more money. Of course, if the producers with substantial cash reserves play a game of poker where they try to squeeze everyone else, then prices could stay lower for longer. The downside of this game of chicken is that countries are hurting, and this could have negative implications for their economies and people. The other downside is that lower energy prices could translate into lower Capex spending, which could translate into lower revenues for companies that provide goods and services to those oil and gas companies. This would also result in less employment by oil and gas companies, which is not good, because oil and gas jobs are pretty good paying ones. This could also translate into various oil and gas players being unable to meet obligations, which would mean debt restructurings and bankruptcies. This could affect financial institutions, since uncollectable loans affect their profits.

If oil prices do end up rebounding at some point in the future however, and ultimately double or triple from here, companies such as ConocoPhillips will be much more valuable. This is where selling the stock today, getting the tax income deduction, and getting exposure to the energy sector until ConocoPhillips starts raising dividends again could pay off for investors. As I have mentioned before, while I sell immediately when a company cuts dividends, I also consider initiating a position back if the company starts raising dividends again. Of course, as I mentioned in the previous paragraph, no one really knows whether these lower oil prices are under a new normal range, or whether they are finally due for some rebounding.

Full Disclosure: Long XOM, CVX, BP, RDS/B

Relevant Articles:

Are Energy Stock Values Today a Once in a Lifetime Opportunity?
The Energy Company I want to buy
Are these oil dividends safe?
Are low prices a justification to buy?
Do not get emotionally attached to a dividend position

41 comments:

  1. Are we about to see more dividend cuts from more oil & gas companies? It's pretty tough to see this. :(

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    1. I am afraid that we will see more cuts, and may have spillover effects elsewhere.

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  2. Have you considered a lower yielder like EOG or a company that has frozen but not cut a dividend? I've decided to get my oil exposure more through oil services companies at this point, and have been adding to them instead. Currently long CLB and NOV, and considering SLB. They as a sector seem to have a little less risk than E&P companies overall.

    Also long XOM, CVX, and OXY

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    1. I like SLB a lot and it's currently around 15x trailing FCF. Even at $30 oil they are making healthy profits, paying a decent dividend, and repurchasing large amounts of stock. They have the leading position in their industry and limited capex needs. They don't raise the dividend every year but they also aim to never decrease it.

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    2. I am looking at companies with coverage of the dividend, which will have room for maneuvering if things stay bad. NOV and OXY do not cover their dividends under EPS estimates for 2015 and 2016.
      XOM can hardly cover it either from earnings, but I just have more confidence in them due to their size. Since I can be wrong, I am thinking of just getting some overall energy etf

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  3. I guess not surprising, but disappointing that COP cut the dividend. COP was the very first stock I bought. I bought it shortly before the 2008 market crash and reasoned at the time that I have to start somewhere and afer all, Warren Buffet bought it so it must be good. I since have lamented that I wish I had known more about investing at that time, but I did have to start somewhere.

    I'm selling COP now, and perhaps should have done so before as I've learned more about stocks and really focused more on asking the question of what my investing thesis is on buying into a stock that I hope to hold forever. Clearly I went into COP with a different thesis then as to how I would judge a stock these days. Well, I guess in hindsight I've made overall better investing decisions recently than when I bought my first stock, so that much is good.

    Farewell COP. It has been a decent ride.

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    1. Yes, but if you held on, you also have half a PSX for each COP you owned – this is a $40 value. So if you bought in 2008, you may have about broken even on price.

      Apparently integrated companies are better at surviving tough times, which runs contrary to the mantra from 3 – 5 years ago that the markets prefer standalone E&P, standalone midstream and standalone downstream companies. Perhaps the lesson is that if management starts listening to wall street too much, and tries to “unlock value” by doing doing spin-offs to appease short-term investors, long-term investors might end up footing the bill.

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  4. I sold this morning before the sharp drop. All told,I made money thanks to a low cost basis, years of dividends and the glorious PSX spinoff that made me a truckload of money. The forward yield if 2.59% is too low for me, I'll reinvest the proceeds into something with a much better yield.

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    1. Yep, at the time I posted the article I had no more COP left ;-)

      Be careful about chasing yield these days - require sustainability and good coverage of the distribution.

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  5. I sold COP and BP quite a while back and concentrated on CVX and XOM. I saw falling oil prices as being more of a hurdle for the former, while the latter are arguably the best-of-breed in the oil industry. Too bad I didn't see the problems with KMI. :)
    Long CVX, XOM, KMI

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    1. I thought COP doesn’t have the earnings to cover the dividend at $66/share yet I held on to my stock, but didn’t add any.
      I try to hold for as long as possible, in order to avoid getting whipsawed. I think BP and RDS.B could be next. If XOM cuts dividends, then chances are we are indeed close to the bottom.

      KMI was a surprise for many. I remember reading an article with a bunch of exclamation points on KMI in June 2015, thinking that the article was crazy and that KMI could never go that low or cut dividends.

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  6. DGI,

    You're right - I think the stock's success will depend on whether or not this is our new normal for oil. I have kept my eye on a few of the oil companies and have been wanting to buy in when it reaches its floor but with your reminder that there may not be a floor for quite some time or "catching a falling knife" I may need to re-evaluate the stand point. I've recently spent the cash that I had put away for an oil company on EMR instead as I felt it was a safer bet and it has been at a discount price that seemed like a safe bet. Thanks for the reminder to not fall into the gambler's fallacy!

    -DM

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    1. The nice thing about me is that I saw the 2008 – 2009 market carnage, when a lot of investors were just buying at the beginning of the correction thinking that they got the deal of the lifetime. Then stock prices kept going lower and lower, until many of these investors disappeared, never to be seen again.
      Somehow, the situation in 2015 reminded me of that, so while I didn’t spend a lot of time bottom fishing on NOV, ESV, BBL, COP, KMI, I did hold on to previously acquired holdings of KMI, COP, CVX, XOM, hoping for the best.
      We don’t know much about where the price of oil is headed – so that means we don’t really understand the business as well as we thought before. On the bright side, well capitalized companies like XOM and CVX might use the current carnage to acquire reserves at fire sale prices, instead of spending time and money on exploration and seismic studies.
      I own EMR, and the yield is likely sustainable. However, I don’t like the fact that the company is having trouble growing earnings per share. So this makes it a pass in my book.

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    2. You're probably right about XOM and CVX making future plans to grab up some others while they're all capsizing. It'd be a bargain for them and if the prices turn around, that stock will take off that much faster out of the gate. Only time will tell where the floor is with the oil companies.

      Thanks for the response,
      -DM

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  7. Curious - Did you sell? You infer that you are going to... ?

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  8. I did not see long on COP at the end of the article so guessing done or doing. :-)

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  9. I'm wondering why you would invest the money from COP back into oil/gas? [I'm not being snarky, I'm curious. You have a long history of DGI, and I'm hoping to learn from your judgements]

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    1. That’s a great question.

      In analyzing my sales after a dividend cut, I have noticed at the cut has occurred around the time a major bottom has occurred. This was the case for GE, though not the case for ARCP. The downside to my selling after a dividend cut is that under a decent percentage of situations, the cut is the bottom, and I end up selling at it, thus leaving out future dividends and capital gains.

      When I sell stocks, I want to keep some exposure to the sector – and XOM looks like a decent addition, though I would like better entry valuations and hopefully a yield of 4%.

      Other than XOM, I do not think I could think of another energy company I want to add to. Perhaps EPD could be an exception, though I am having second doubts about pass through entities. People have been telling me to look at MMP and SEP, so I may look at them, but still I have changed my mind for pass through entities as a whole.

      So my thinking is that if I cannot find other good energy companies to buy today, and since I want to have some energy exposure, it may make sense to own a diversified collection of energy stocks. I would keep any dollars from other energy sales in that energy fund as a placeholder, until I see individual names I want to hold that look cheap and are growing dividends. I doubt that the whole energy basket will go to zero.
      On the other hand, it could be argued that I have a fear of missing out. This could be dangerous if things keep getting worse from here for energy ( or stay worse as they are). I could see that if oil rebounds, assets like COP will be worth more than today. Of course if it doesn’t, I would have violated my strategy where the end result is more dividends every year, and suffered as a result of it. OR perhaps I have fallen in love with the energy sector, and should just chill out until we get the fundamentals that would support further dividend cuts.

      Per my disclosure, I haven’t added to the etf.

      Please keep asking me questions, it helps me think things through

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    2. That's pretty interesting... I think my buys are watched pretty closely as the signal for the world to sell. You're saying that when you sell, it's time to buy?

      Be warned, then: I bought XOM when it plunged to $74 the other day (i set up one of those "good 'til cancelled" orders set up and it struck on or near the open)

      If I were to think about it rationally, I'd stay away altogether. The price of oil seems to be responding to hopes and dreams right now more than anything fundamental like supply and demand.

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  10. XOM is one of the best and most diversified companies out there. At this juncture, I really wouldn't buy anything... To me, it makes no sense for many of these companies (even premiere ones like CVX, XOM) to be trading at these levels... Not when revenue is down 30%+ Y/Y... For instance, CVX was a $90 stock when oil was ~$100!

    Further, no one knows how much worse things will get... There is way too much oversupply in the market right now, regardless of what Russia/SA decide to do... When it comes to oil, I've learned from the gold/silver/copper space... The downturns can be far worse than anyone could have ever predicted... and you cannot clear excess supply overnight. Gold/silver have been in a bear market for 4/5 years now... Oil didn't start dropping off until late 2014...

    Not suggesting the same will happen, but look at the gold majors: ABX, NEM, GG... they all had to cut dividends, cut CAPEX, eliminate exploration, etc.

    That's what devastation in commodities really look like... No crystal ball, but I've seen much worse than what is happening in oil right now, which is why I'm on the sidelines (outside of a few short positions).

    All the best!

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    1. Do not forget that CVX and XOM do not just produce oil and gas, but also transport and refine those commodities. This provide a diversification benefit, since refining typically goes on a different cycle than exploration & production

      The last time oil was last selling at $100, that was in July 2014. CVX was selling for about $129/share – it is selling at $85 now. Only when oil was selling at $80 - $90 in 2011 and 2012, did shares trade around $100. But then you have to ask yourself, is price of oil the only metric that determines the value of CVX individual shares? What about production growth, number of shares outstanding? Again, what about refining and marketing and chemicals?

      The one thing about oil and gas is that there is real economic demand for those commodities, and once they are used up, they are largely gone. Gold and silver have limited economic usage – thus all gold/silver that has ever been mined is still out there, and the amount available is increasing each year. If all gold disappears, the world can still go on, and we can decide that sea shells are really valuable, since in the old days people valued them highly in exchange. But if oil and gas disappear, we are in for a lot of trouble ( though we all get to use mostly solar, wind, hydro etc we won’t be able to use oil for its many other uses like chemicals, plastics, asphalt, pharma etc)

      The other difference is that for many oil and gas majors, we have historically enjoyed stable and growing dividend payments over long periods of time in the decades. Gold/Silver stocks have never been as dividend investor friendly as energy companies.

      Long story short, you cannot just compare between commodities and calling it a day, without really understanding the differences between the two.
      That being said, I think that XOM is expensive based on expected earnings for 2016 of 2.67, and even 2017 eps of $4.34. So is CVX at $1.67 though not so much at $4.67. Though the 2017 numbers are probably too high of an estimate that will go down. I would be interested in XOM at an yield of 4%.

      The thing about commodities is that they look cheapest at the end of the bull cycle, because EPS is its highest. They look very expensive at the bottom of the cycle, because EPS is low ( or nonexistent). This is what makes investing in them an art, since you have to estimate a fair EPS on top of a fair valuation multiples for say a XOM. While for PEP you have higher confidence in the EPS stability.

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    2. With gold, yes that's true and I agree with you. Absolutely not true with regards to silver though -- silver is an industrial metal that is HEAVILY used in high-tech, semiconductors, solar panels, etc. It has real world applications for sure.

      I wouldn't be so quick to dismiss gold either. With all the ZIRP, NIRP, QE running rampant in our world, one would be wise to hold some precious metals now. The problem with gold is that it's never been educated with the masses and most people don't understand it.

      Historically, oil/gas companies have been more dividend friendly but I honestly don't see the difference in comparing them... Supply/demand impacts both sectors, and the companies all operate in a cyclical market... Dividends are great, don't get me wrong, but they can be blinding, as was the case of KMI and COP. What I'm suggesting is to simply pay attention to other sectors in the commodity space... You can use copper, uranium as well... Oil/gas has NOT been hit anywhere near as hard as those other sectors. Again, not suggesting that'll happen (especially with the diversified majors like XOM and CVX), but if anyone wants to know what real devastation looks like, study up those other sectors...

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    3. Found this on a quick search, but I'll need to verify with my sources inside the mining industry:

      "In 1900 there were 12 billion ounces of silver in the world. By 1990, the internationally respected commodities-research firm CPM Group say that figure had been reduced to around 2.2 billion ounces of silver.

      Incredibly today, that figure has fallen to less than 1.39 billion ounces in above ground refined silver (World Silver Survey 2014 P36-43). Thats means that all the refined silver in the world that is available for industrial and investment purposes is worth less than $30 billion. It puts the scale of the Federal Reserve's monthly QE into perspective - from $85 billion to $35 billion today.

      It is estimated that between 50% and 90% of all the silver that has ever been mined has been consumed by the global photography, technology, medical, defense and electronic industries."

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    4. Sure, you can use silver in different industries. But then you get to use it as scrap later on, can’t you? Yes you can.

      Not the same with oil ( of course, this was already mentioned above). Still, it is interesting that silver and gold companies have not managed to grow dividends consistently, despite all the hype behind them.

      Many of the oil and gas companies have managed to do that even when commodity prices were in the doldrums in the 1980s and 1990s. XOM has raised dividends for over 3 decades, which covers the oil bust of the 1980s, 1990s and the boom in the 2000s.

      If I had to choose between owning all the gold in the world and all the oil in the world, I would choose oil. If I had to choose between all the farmland in the world, and all gold, I would choose farmland. You can have all the gold in the world.

      I am not going to debate with you why gold is useless to me. You can check this article: http://www.dividendgrowthinvestor.com/2011/03/gold-versus-dividend-stocks.html

      Despite all NIRP, ZIRP, QE etc, gold is largely where it was 6 years ago. Gold is terrible to own during a deflation, but good if we have hyperinflation. I refuted the hyperinflation fears back in 2009, and luckily lost a lot of readers that can’t think beyond the hype.

      http://www.dividendgrowthinvestor.com/2009/04/hyperinflation-scam.html

      After reading your site, and your comments, it is obvious that you do not understand dividend growth investing. You are just falling prey to the hype by gold bugs and perma bears. They all sound very smart, yet they have been wrong for 30- 40 consecutive years.

      I have had 2 energy dividend cuts, out of a diversified portfolio mostly consisting of 50 -60 companies (the rest account for a tiny portion). To put this in perspective, you can’t expect to win on every swing. Perhaps it is my fault that I like to talk about my failures, and not enough about my success, because of the educational value in learning from mistakes. Maybe I should just talk about my successes, like everyone else who tries to “motivate” others.

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  11. I cannot understand why any oil company that is borrowing continues to pay dividends. Using more debt to pay money to shareholders in this climate is a road to ruin.

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    1. It all depends. If the drop of oil was temporary, like in 2008 – 2009, then it made sense to keep paying a dividend no matter what. When COP cuts dividends, they are essentially stating that they think oil prices will be lower. When they maintained it in 2008- 2010 and in 2014- 2015, they were stating that they expect oil prices to rebound.
      Perhaps many oil companies increased dividends too much, too fast during the good times, and forgot about the possibility of bad times

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  12. I ditched COP and BP last year when Buffet dumped his NOV, and COP position. I took a small profit and called it good. However, I was up and up with KMI, I haven't sold KMI but the stock nose dive right after cutting dividend and continue to fall "A LOT" further. So, I'd say sell the stock right after the announcement, take a little loss or a little profit and run is the best scenario.

    I'm continue to monitor Oil and Gas companies. I'm itching to jump in, but you said in your article XOM and CVX are pricey right now.

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  13. I closed my COP position in December for this precise reason. The financials just didn't look right and that was with an avg price per barrel in the $40s or so for 4Q15. Plus the dividend was going to have to be cut at some point during 2016 unless oil shot back up to at least the $50-60's rather quickly. I thought they might be able to wait until the next payment and see what the oil price does. I'm curious if this is them forecasting "lower for longer" scenario playing out or just admitting they had to do it so it's best to get it over with.

    It seems that COP made 2 big mistakes regarding PSX. One was spinning it off in the first place. Why get rid of your counter cyclical to oil price carnage? And two was not reducing the dividend commensurately with the PSX stake being spun off. No one would have complained about that because it would make complete business sense. You split a company in two and the dividend for each should be smaller by themselves but together total the same or higher as the combined entity.

    It'll be interesting to see how things play out the rest of the year. There's a lot of factors in play to determine oils trajectory. Big one is SA. I need to look into it more but they're keeping production high I think partially because they absolutely have to or the country will completely fall apart. That's pretty the the governments only revenue source from the little bit of research I've done. I also think that once we get to the $50-60 range there's a good chance of seeing it drop back down into the $30s or low $40s depending on the timing of current production fall off and the timing of fracking/production picking up. So I expect a decent move higher at some point but wouldn't be surprised to see another big fall off.

    I also think the longer it takes to truly put in a bottom the quicker and more extreme the snap back will be. Although being employed in the oil field, well I've escaped the layoffs thus far, I would like to see it back in the $50-60 range.

    The carnage in the oil field has made me really question my desire to own companies that have no distinguishing factors than their competitors. If you're going to stay in the oil patch with investment dollars for a DGI/long term investment you need to focus on financial strength and operational excellence above everything else.

    Sucks to see the dividend cut from COP but it was a very high probability scenario. It'll be interesting to see what happens if/when one of the integrated majors cuts theirs. I think you might see others follow suit because it's the right thing to do but they just didn't want to be first.

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    1. Thanks for your comment. I saw in early 2015 that COP cannot cover the dividend. But I expected oil prices to rebound, and I also believed that they ( or their predecessors) have historically been able to withstand low oil prices and not cut dividends. While I didn’t’ add more, I guess I thought these oil companies had “staying power”. I was wrong, since COP had no R&M operations. I actually expected that BP will be the first to break the “bad news”, but so far I have been wrong.

      You bring a good point in that the COP dividend was too high, and didn’t account for “uncertainty”. I am curious after the fact as to why oil companies haven’t hedged their production. When justifying spend for projects, their revenue projections usually show oil prices growing at around 2% - 3%/year ( accounting for inflation). This is something I ponder about a lot.

      I think that oil countries are playing a dangerous game, where everyone loses. Some have cash reserves to help them for a long time (SA), while others may have some more social unrest. I am hopeful that this doesn’t destabilize peace all over the world. Perhaps a good hedge against that could be some LMT.

      I agree on the financial strength part. The problem is that COP looked great in 2012, 2013, 2014. This is when I was buying it. The company looked strong at the time. Even in 2015, many thought the price of oil will rebound – little did we know that everyone will keep pumping to the detriment of everyone.

      It gets murky when a company you buy starts getting disappointing fundamentals several years after I bought it. While monitoring shows you some deterioration, you also don’t want to get whipsawed under any single time of trouble too. I mean TGT looked terrible when I bought it at $55/share, but I expected it to earn more under “normal conditions”. And it turned out well. This is why I believe investing is part art, part science.

      If you look at COP, and the legacy teams, they have had very good track records of capital allocation. Plus, they were selling assets in the early 2010s, and they were smart to dispose of Lukoil. Perhaps they were “too shareholder friendly” when they spun-off PSX, since they lost the counter cyclical movement in refineries ( and if you study refinery margins and refinery earnings, they looked terrible prior to the spin-off when oil was high)

      Unfortunately, one cannot have their cake and eat it too. Hindsight is always 20/20, so you will always have uncertainty in anything you do. Of course, watching this unfold in real time is really interesting. The pendulum will swing the other way in a few years, when the industry realizes that spending is cut to the bone, and supply starts falling short from demand. You may like this article:

      http://www.dividendgrowthinvestor.com/2014/12/are-energy-stock-values-today-once-in.html

      The surprising fact to me is why you are investing in oil & gas to begin with, given that your income comes from the industry? Also, don’t you think that BP is at risk of dividend cuts as well?

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    2. DGI,

      I agree with your last sentence 100%, well about 75%. I need to reduce my exposure to the industry due to my income coming from there as well. I honestly have way too much tied up in the industry between income and investments. That's part of the reason that I closed my COP position. It wasn't fully related to the dividend but my concerns about it made my decision for me. Preserve capital and get away from the high likelihood of a dividend cut and reduce exposure to the industry since I could very well lose my job too. It made sense on just about every front. I've reduced my exposure, partly due to the share price decline and closing some positions down to about 11% of my portfolio and don't have any plans to add soon except for XOM DRIP. XOM should make it through this downturn better than most.

      I agree about not wanting to get whipsawed about because the fundamentals deteriorate some but a lot of my decision was already made. I had started contemplating closing my COP position in 2014 and revisited the idea every couple months until I finally bit the bullet on the dividend concerns. I'm just glad I was able to get out with an IRR of 2.23% and still have my PSX stake which I hope to examine in more detail over the next week.

      The last year or so has made me question whether I want any solo E&P or R&M within my portfolio because there isn't a natural hedge in operations. I won't participate in as much of the upside but I'll also avoid a big part of the downside by sticking with the integrateds so it should be a smoother and less emotional ride over the long term.

      It seems like COP's decision to keep the dividend rate the same was what really hurt them when they spun off PSX. If oil prices were stable then COP would have been fine and investors could have just expected lower dividend growth while EPS/cash flow grew to provide more coverage. But as we've all learned over the last year oil is far from stable, as with any commodity, the price can fluctuate violently at times. Trying to predict future operations/cash flow for companies that can't really differentiate their product from the next means they're at the mercy of the markets for oil. In essence they were betting on a stable or growing price in the underlying commodity to improve their situation and didn't account for the possible swings in the commodity.

      I believe many of the companies do have their production hedged but the problem is that the hedge contracts are running out. Don't quote me on that because I haven't fully explored it but I remember reading some comments/articles regarding that.



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    3. As for hedging:

      ExxonMobil "We generally do not use financial instruments to hedge market exposures"

      Source :http://www.sec.gov/Archives/edgar/data/34088/000119312512078102/d257530d10k.htm

      Interesting article on others: http://www.bloomberg.com/news/articles/2015-08-19/oil-patch-s-biggest-losers-sell-crude-for-more-than-exxon-mobil

      And this article is very interesting: http://www.reuters.com/article/contl-resources-ceo-hedging-idUSL1N0SV45Y20141107

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    4. Thanks for the links I'll have to check them out in more detail this weekend. I can't speak for XOM but as far as CVX goes they do hedge in some form. It might not be direct hedging where the future sale price is agreed upon in advance but one of my friends works in the trading department at CVX and deals with buying/selling contracts. Guess I should ask him if that's directly for hedging purposes or is it just as a subsidiary to try and take advantage of short term movements or what exactly their purpose is.

      Regarding the Continental Resources article they had previously hedged but have since closed their hedging positions. So their betting on a rebound in oil to provide a natural hedge, although who knows when that will happen. New hedging contracts don't make sense because they would be too expensive to hedge at a price that would generate a profit.

      Also in the article from Bloomberg I think it's interesting that they used those companies as a comparison. XOM and CVX are extremely different from the small, I'm assuming, pure E&P companies that they have listed. The other companies had to hedge or they wouldn't be able to access the capital markets. I suspect since XOM and CVX are integrated and they're size/scale that they don't need to rely on financial hedges because they have natural hedges in their R&M divisions.

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  14. In life time of cop stock hss it been best to ditch the stock or hold and build your position through ups and downs? If u owned it last say 25 yrs how many times would u dumped it at just time u should been building your position?

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    Replies
    1. COP in its current form didn’t exist 25 years ago. The original Conoco was acquired in 1981 by DuPont, and sold to the public in 1999. To the best of my knowledge, Phillips petroleum had not cut dividends in the 1980s or 1990s. You had Phillips Petroleum merging with Conoco in 2002 to form ConocoPhillips. Then the company split into two – Phillips 66 and ConocoPhillips in 2012. But either way, I do not think there were dividend cuts by Phillips Petroleum or Conoco.

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  15. There appears to be a lot of overreacting by investors in this sector. I didn't have COP, but I'm not touching my XOM, BP & KMI holdings. Selling at lows is what kills long-term investment strategies. It's exactly what should not be done.

    Imagine if everyone decided to sell all their stocks that cut dividends back in 2008-09? (as many did) It ruins you!

    COP & KMI both are still paying a yield above the S&P 500 average, and I'm not positive, but they are likely still in the top 25% of payers! ride it out is my opinion.

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  16. I wholeheartedly disagree with disposing of positions because of an industry downturn. This type of reactionary investing destroys long-term value.

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  17. Thank you for sharing. I own COP, along with XOM, BP and KMI. I decided not to sell off my position, but strongly considered. While I do believe the price will continue to drop in the near term, I'm in it for the long haul and betting it will rebound down the line. It's hard not to resist dumping but luckily my position isn't large so it makes more sense for me to keep it and wait for oil to rise.

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  18. I know you mentioned EMR as having issues growing earnings. But this is mostly driven by oil dropping. Can't EMR be a safer play on oil?

    If oil stays low, EMR's dividend is still safe and it has a fat 4%+ yield. The payout ratio is very manageable still and the stock has a good balance sheet. If oil recovers to say $60 or 70, they probably see a huge boost to earnings, so there's lots of upside, where they can shower shareholders with mid single digit dividend increases or more. And if oil stays here, you'll get token 1% bumps and a high yield, while you wait out the storm. I don't know if the same can be said for XOM. If Oil stays here for say 2 years, XOM's dividend is probably toast, and EMR's is unlikely to be, since only a portion of their business is exposed to oil.

    This also goes for DOV, another dividend aristocrat. Huge upside in terms of capital gains and earnings if oil recovers, but if oil doesn't the dividends still appear safe. PNR also is included here, but they have less exposure to energy sector, but it was dragged down.

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  19. I jettisoned COP and BP a year ago when Smorgasbord dumped his NOV, and COP position. I took a little benefit and called it great. Be that as it may, I was up and up with KMI, I haven't sold KMI yet the stock crash directly subsequent to slicing profit and keep on falling "A Ton" further. Along these lines, I'd say offer the stock directly after the declaration, assume a little misfortune or a little benefit and run is the best situation.

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