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* Oil majors' dividend yields soar as shares slide
* Firms to borrow more to cover dividend, capex
* Pressure grows as oil rout persists
By Ron Bousso
LONDON, Jan 29 (Reuters) - As Europe's top oil companiesmake deeper retrenchments due to slumping oil prices, theirgenerous dividend policies are coming under closer scrutiny.
Royal Dutch Shell, Total and BP are among those set to report dismal earnings next week for thelast quarter of 2015 when oil prices averaged $43 a barrel, downmore than 40 percent from a year earlier.
Those prices mean company boards have little choice but tocut spending, crippling growth prospects.
And as income shrinks, companies can only borrow more inorder to maintain their commitment to pay out dividends. Lowdebt levels mean that for now they are able to maintainunchanged dividends.
But the pressure is high.
Average dividend yields - the dividend payout relative tothe share price - soared over the past year to an all-time highof above 7 percent as share values have shrunk.
Shell's yield rose to above 9 percent from around 6 percentin 2014 while BP's is above 8 percent from around 6 percent,which according to UBS are "levels usually associated withinevitable cuts".
In 2015, Europe's oil majors paid around $27 billion a yearin dividends, which have been an investment cornerstone fordecades. Shell and BP alone account for 10 percent of the FTSE100 total dividends in 2014, according to Macquarie.
Charles Whall, portfolio manager at Investec AssetManagement, said oil companies' flexibility to borrow and anunderlying confidence in an oil price recovery means they shouldmaintain dividends.
"More importantly, these (dividend) levels will keep thepressure on the majors to prioritise projects and not to fuelanother OFS (oil field service) inflation spiral," said Whall,whose portfolio holdings include shares of several majorsincluding Shell and BP.
"A focus on returns rather than growth should allow thesecompanies to outperform in what is likely a low-growth world."
UBS analysts sees dividends at Norway's Statoil andAustrian group OMV as the most vulnerable. Analysts atBarclays also said OMV's dividend appeared increasingly at risk.
A spokesman for OMV, which announced on Friday it was forcedto take write-downs totalling 1.8 billion euros, said "so farnobody has changed the target of a 30 percent payout ratio (ofnet income)".
Statoil, whose exposure to the oil price is bigger than manyof its peers, has repeatedly said its dividend policy remainedfirm.
Italy's Eni is the only European major to have cutits dividend, while Shell, which is set to complete its $51billion acquisition of BG Group next month, has vowed tomaintain its dividends.
HARSH REALITY
But with oil prices still languishing near their lowestlevels since 2003, companies might soon run out of options.
"The longer you've got low oil prices, the more companieswill have to focus on pure survival. Even for the long-termplayers, this is becoming the harsh reality," said Macquarieanalyst Iain Reid.
"If oil prices stay at $30 a barrel over the next fewquarters we will reach the stage where the pressure to cutdividends will become very difficult to resist. Companies willsay 'Do we really want to sacrifice all future NPV (net presentvalue) growth for our dividends?'."
Analysts expect a shift in executives' messaging ondividends in the upcoming earnings.
"Dividends, supported by scrip, are expected to remainintact in 2016; however, we expect the 'sacrosanct' messaging tobe distanced as the impacts of a near $30 a barrel priceenvironment are realised," BMO Capital Markets analyst BrendanWarn said in a note.
Next week's results are expected to see another sharp dropin income, with companies set to announce further capitalexpenditure cuts, asset sales, job cuts and costs savings.
"The companies have positioned themselves for $60 a barrelfor this year, now they will have to position themselves atlower than $50 a barrel," said Macquarie's Reid, who expects atotal of $15 billion in new capex cuts.
Global oil and gas investment in 2016 is expected to fall toits lowest in six years to $522 billion, following a 22 percentfall to $595 billion last year.
Refining and trading operations, which offset a large partof profit declines from oil and gas production, is set to onceagain come to the rescue, albeit less than before as globaldemand eased at the end of last year, according to analysts.
(Additional reporting by Karolin Schaps and Shadia Nasralla inVienna and Stine Jacobsen in Oslo; editing by Susan Thomas)
