Financial Report Analysis

Muhammad Zakky Alif

Financial Management

Investment

Source        : Wall Street Journal

Tittle             : Big Oil Dillema: Dividends or Ratings

1. What is the common dividend policy that used to be adopted by many big oil companies? Explain that policy!

Answer :

Modigliani and Miller theorized that, with no taxes or bankruptcy costs, dividend policy is also irrelevant. This is known as the "dividend-irrelevance theory", indicating that there is no effect from dividends on a company's capital structure or stock price. MM's dividend-irrelevance theory says that investors can affect their return on a stock regardless of the stock's dividend. MM's dividend-irrelevance theory assumes that investors can affect their return on a stock regardless of the stock's dividend. As such, the dividend is irrelevant to an investor, meaning investors care little about a company's dividend policy when making their purchasing decision since they can simulate their own dividend policy.

1. What is the impact of carrying out the above policy to the credit rating? Explain the transmission mechanism such that the policy will result in the (worse/better) credit rating!

Answer :

Based on the articles, Jeff Woodburry says that “We get value from the AAA credit rating in our business, whether it be access to financial markets or access to resources”. This indicates that the decision making by Exxon to keep pay their dividend to shareholder also maintaining their rating to get more resources by issuing bonds. Since oil and natural gas comapies should spend money to find new fuel reserves to replace what they pumped out of the ground and it is very costly.

1. Suppose that you are the CFO of big oil company that facing the dilemma, what will you do? Explain why you do so!

Answer :

First thing to do is calculate what is the best capital structure to keep sustainability of the company. Because the proportion between debt equity will affect the decision making process. What Exxon do is because they think that to get more debt so they can expand their resources. Otherwise Fadel Gheit, an analyst at Oppenheimer & Co says that Oil company should reduce the payouts because if they don’t reinvest back in the business, they are on the road of liquidating. So what I will do is try to reducing the dividend but also maintaining the credit rating to get more resources.