It’s taken a pandemic, but Royal Dutch Shell (RDSB) has finally cut its dividend. The two-thirds reduction in the payout will take it down to 16c (12.8p), and is the first drop since World War II.
The decision came in the same week fellow supermajor BP (BP.) decided to keep its dividend steady, at a higher rate brought in for the December quarter. Oil and gas giants Chevron (US:CVX) and ExxonMobil (US:XOM) also held onto their dividends, at $1.29 and 87c respectively.
In an analyst call, BP chief executive Bernard Looney said the board’s decision to maintain its payout was “based on the underlying performance of the business in the first quarter and the actions being taken by the team”. The company is aiming to get to a breakeven point of $35 per barrel (bbl), including the dividend, next year, through cutting spending and operational costs. Consultancy Wood Mackenzie forecast Shell cut its per-barrel cash flow breakeven from $51 to $36 by cutting the dividend.
When BP announced the higher dividend in February, outgoing finance chief Brian Gilvary said the driver was a combination of higher expected cash flow for 2020 and 2021 and the divestment cash coming in. This divestment cash is now less certain, with BP getting less up front from Hilcorp for its Alaska assets.
Shell’s share price was down 6 per cent on the news, to 1,392p. After the cut, its yield has come down to 3.5 per cent from 10 per cent. Shell said the new dividend was not a short-term measure, with 16c the new baseline. While the company’s average realised oil price in the March quarter only fell by 20 per cent, to $46.53 per barrel (bbl), its preferred profit measure, net income adjusted for cost of supply (CCS), fell by almost half in the period, to $2.9bn. The upstream division saw an 82 per cent drop in the CCS profit figure year-on-year, to $291m.
Brent crude has been trading below $30/bbl since mid-April, and Shell chief executive Ben van Beurden said the company was not forecasting a quick recovery. “Given the continued deterioration in the macroeconomic outlook and the significant mid and long-term uncertainty, we are taking further prudent steps to bolster our resilience, underpin the strength of our balance sheet and support the long-term value creation of Shell,” he said.
After the oil price crashed in March, the company announced a 20 per cent cut in capex and freeze in the buyback scheme. Shell also borrowed $12bn at the start of April to take liquidity up to $40bn.
Panmure Gordon analyst Colin Smith said the supermajor’s March quarter results were good, considering the dividend cut. “Shell’s decision to cut the dividend at this stage given its comparatively robust balance sheet and strong [March quarter] results is a big surprise and indicates deep concern about the future financial performance of the group as the full impact of lower prices and reduced demand make themselves felt,” he said. Jefferies analyst Jason Gammel also said the cut was unexpected. “Shell had ample liquidity to preserve the dividend although it would have strained gearing ratios,” he said.
Shell’s gearing was 29 per cent as March 31, up from 26.5 per cent year ago. In the same period, BP’s gearing went up to 36 per cent from 30 per cent.
Removing the working capital build of $7bn, Shell’s operating cash flow fell 39 per cent year-on-year in March quarter. Despite the new borrowing, net debt fell compared to the end of 2019, to $74bn.
