This morning, European energy giant Royal Dutch Shell made history when it became the first supermajor to cut its dividend for the first time since the second world war as the coronavirus pandemic cut quarterly earnings in half and forced the oil major to slash spending in order to preserve liquidity. The board of Shell said it had decided to reduce the quarterly dividend to 16 cents per share from 47 cents.
“Shareholder returns are a fundamental part of Shell’s financial framework,” Chad Holliday, chair of the board of Royal Dutch Shell, said in a statement.
“However, given the risk of a prolonged period of economic uncertainty, weaker commodity prices, higher volatility and uncertain demand outlook, the Board believes that maintaining the current level of shareholder distributions is not prudent.”
According to the FT, the cut in the payout by two-thirds is part of a "reset" of the Anglo-Dutch group’s dividend policy and not a short-term measure, amid concerns about economic growth as well as questions over future oil prices in a world that shifts towards cleaner fuels.
Net income adjusted for cost of supply, the company's preferred profit measure, dropped to $2.9bn in the three months to March 31. This compared with $5.3bn in the same period the previous year and analysts’ estimates of $2.3bn.
The company is taking the first steps of a "fundamental shift for Shell over the next 30 years", CEO Ben van Beurden told reporters on Thursday, "balancing short-term needs with long-term goals" to become a net-zero emissions business by 2050. "Today is a very difficult day for the company,” said van Beurden. “But it is the prudent thing to do . . . We absolutely want to preserve the financial resilience of the company even though we have no idea what could happen."
van Beurden described energy market conditions through the first three months of the year as “extremely challenging.”
“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 added.
Shell warned that the situation would be even “more severe” in the second quarter, with oil prices at the start of the year likely to be a “high point” for 2020. Brent crude, the international benchmark, is trading around $24 a barrel having hit an 18-year low last week. “We don't expect a recovery in demand in the medium term,” Mr van Beurden added.
Alongside the cut to its dividend, Shell announced it would not continue with the next tranche of its share buyback program. Since the launch of the program, the oil major said it had bought back almost $16 billion in shares for cancellation.
“On the face of it, the dividend cut and cancellation of share buybacks may be seen by some shareholders as a negative move in the short term,” David Barclay, senior investment manager at Brewin Dolphin, said in an email.
Energy consumption worldwide could drop 6% in 2020, the International Energy Agency said on Thursday, equivalent to India’s total annual demand. van Beurden said it was “hard to say” if oil demand would ever return to previous highs.
Shell was already under pressure before the coronavirus outbreak with weaker refining and chemical margins and challenging economic conditions forcing the company to slow shareholder distributions and re-evaluate debt reduction targets. Since then, in response to the pandemic, Shell has said it will suspend its share buyback program altogether and announced that capital expenditure would fall to $20bn or less this year, from initial plans for $25bn. It also said its operating costs would decline by $3bn-$4bn.
The current environment stands in stark contrast to last year, when Shell’s cash bonanza prompted it to say that oil prices above $60 a barrel could enable the company to distribute at least $125bn to shareholders in the form of dividends and buybacks over the next five years.
The CEO said that pledge was “against a totally different backdrop”, adding that Shell was preparing for a deep and protracted downturn. Not cutting the dividend would have left Shell “without options” to reposition the company for the future. The annual payout will fall from almost $15bn to just over $5bn, freeing up $10bn of capital.
Commenting on the move, Tom Ellacott at Wood Mackenzie said: “A permanent dividend reset could also accelerate the strategic pivot [from Big Oil] to 'Big Energy' through the reinvestment of more retained earnings in the youthful zero-carbon energy sector.”
Richard Buxton, head of UK equities at Merian Global Investors, who counts Shell among his top 20 holdings, said he was “absolutely delighted” at the cut, adding: “We could not square the circle of investing in the energy transition, managing long-term reserves and their ultimate decline with over-distribution.”
Until now, oil companies - especially dividend aristocrats - had largely pulled on a series of financial levers, also including bond issuance and securing new credit lines, to safeguard their dividends. Yet analysts said these measures were not enough to offset the hit to cash flows. This week BP maintained its dividend despite a 66 per cent drop in first-quarter profits but said it would review the shareholder distributions in the second quarter. However, last week, Norway’s Equinor became the first oil major to cut its dividend this earnings season. It raised concern that other energy giants may follow suit.
Shares of Shell dropped to the bottom of the European benchmark during early morning deals, down more than 7%.
Oil companies have been in crisis mode as lower energy prices and a collapse in demand for fuels and chemicals puts intense pressure on their finances, with severe lockdowns and travel bans in place across much of the world.