Energy firms’ dividends are unsustainable says this hedge fund CEO

Energy companies are offering "unsustainable" dividends for which they are wrongly rewarded by the market, the CEO of an energy-focused hedge fund told CNBC.

Oil companies have largely guarded their dividends, despite the collapse in crude prices since 2014. The industry has a tradition of providing steady dividends and has tended to opt for spending cuts rather than reducing payouts to investors.

For instance, BP (London Stock Exchange: BP.-GB) announce a pretax loss of $865 million for the first quarter of 2016 on Tuesday, but held its dividend unchanged at 10 cents per ordinary share.

Nearly 80 percent of energy companies maintained or increased their dividend payments in 2015, according to a post on the Research Centre for Energy Management website. That was despite companies struggling to generate cash in the face of depressed oil prices.

In March, Chevron (NYSE: CVX) chief executive John Watson reiterated the importance of dividend growth, even as he announced new spending cuts. The company has hiked dividends for 28 consecutive years.

Royal Dutch Shell (London Stock Exchange: RDSA-GB) has not cut its dividend since 1945 and ExxonMobil (NYSE: XOM) has increased its dividend each year for more than three decades, according to Schroders, an asset management company.

"A lot of companies have adopted dividend policies that are unsustainable and have been rewarded by the financial markets that don't sufficiently question the sustainability," Harald Otterhaug, the head of Oslo Asset Management, told CNBC last week in London.

"A lot of that unsustainable dividend has been financed by easy access to credit markets and equity markets and last year when the credit and equity markets shut down for a lot of these companies, it became pretty quickly evident the dividends were unsustainable and investors realized that a lot of the dividend they were receiving in recent years had been return of capital rather than return on capital and there wasn't much capital left," he added.

"We believe that longer term, in order for production to be economical, oil prices need to go significantly higher, but it is a big question mark when and how that happens," Otterhaug told CNBC.

Oslo Asset Management's strategy is to exploit "fundamental inefficiencies in publicly traded securities globally within energy and natural resources," according to its website.

"I think that (unsustainable dividends) was a big theme that played out last year; but again it is still in early innings, I think there are plenty of opportunities out there yet," Otterhaug told CNBC.

Both Brent (Intercontinental Exchange Europe: @LCO.1) and WTI (New York Mercantile Exchange: @CL.1) crude futures have rallied by around 37 percent since the start of the year, but remain far off the peaks above $100 per barrel reached in the first half of 2014.

Schroders said oil companies' commitment to paying dividends rested on crude prices recovering.

"A continued drought will place further pressure on energy companies' ability to cover their dividends through earnings from day-to-day operations," it said in a blog post last month on its website.

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