The oil majors will have an extraordinarily difficult time trying to maintain their hefty dividends in today’s oil market environment, and unless oil prices rebound substantially, companies may be forced to slash their payouts to shareholders.

The largest oil producers pay shareholders a combined $40 billion in dividends each year, a level that is not sustainable with oil prices at $50 per barrel, according to Chris Kettenmann of Macro Risk Advisors. “There’s massive risk to the dividend structure of these big oil companies over the next 12 months,” Kettenmann said on Bloomberg TV.

Since oil prices began collapsing in mid-2014, the oil industry has made several rounds of cuts to spending programs and payrolls, and they have shelved major projects that no longer make sense. The price meltdown and the extreme pullback in spending and exploration has inevitably led to a sharp fall in new discoveries, which reached a nearly 70-year low in 2015 and will reach a new low this year.

Altogether, the oil industry has slashed more than $1 trillion in planned spending for the years between 2015 and 2020. But that still may not be enough to right the ship. Despite the cuts, most of the oil majors are still not generating enough cash to cover both their operational expenses and their promised payouts to shareholders. To plug the hole, the majors, without exception, are taking on much higher levels of debt to keep the dividend policies intact.

Kettenmann of Marco Risk Advisors says that the five largest oil majors – ExxonMobil, Royal Dutch Shell, Chevron, Total SA, and BP – are set to disperse $40 billion in dividends over the next year. Related: Proving Them Wrong: How The U.S. Oil And Gas Industry Survived

ExxonMobil’s predicament is instructive. The largest publicly-traded oil company in the world took in $10.5 billion from cash flow and assets sales in the first half of 2016, a staggering sum. But that was not enough to cover both the $10.3 billion in capex spending, and also the $6.2 billion dividends that it paid to shareholders. Macro Risk Advisors’ Chris Kettenmann said on Bloomberg TV that ExxonMobil’s massive $12 billion annual payout was at particular risk. And Exxon is often considered the richest and most financially sound compared to its peers, so its struggles are a sure sign that the industry is in the midst of severe turmoil. Exxon’s debt jumped to $44.5 billion at the end of the second quarter, up sharply from the $33.8 billion a year earlier.

For now, ExxonMobil appears very intent on doing whatever it can to avoid cutting its dividend policy, which it and its peers consider to be untouchable. With the oil majors struggling to grow production – a problem they dealt with even before the collapse in oil prices, but has grown worse since – high dividends are a way of attracting investors. They can’t offer growth, so they offer generous and stable payouts to shareholders. Related: Oil Wars: Can Russia Hold Off Middle Eastern Oil In Eastern Europe

But continuing to pay so much to shareholders cuts into the prospects for future growth, prospects that were, of course, weak to begin with. ExxonMobil, Shell, BP and the other majors have shelved large-scale drilling projects and laid off a lot of personnel while refusing to touch their dividends. Without new projects, natural depletion will eat into their production levels over time and output will start to fall.

Referring to companies’ preference not to touch their dividends, Kettenmann says that it’s a risky decision. “They might be able to borrow to pay it but it raises this question about sources and uses of capital,” he said. “Are you really growing value within the company spending $12 billion a year on share distributions versus investing in projects that are generating a rate of return for investors?”

If oil prices do not rebound, something will have to give. There is less and less fat to cut within the companies; they have already shelved the least profitable oil fields and squeezed their suppliers as much as they can. They have also savagely cut their payrolls. If oil prices hover at $50 per barrel for another year or so, the oil majors may have no choice but to turn their sights on their dividends.

By Nick Cunningham of Oilprice.com

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