Royal Dutch Shell cut its dividend for the first time since the second world war as the coronavirus pandemic halved quarterly earnings and forced the oil major to confront a new longer-term reality for the energy industry.
Oil companies are 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.
Thursday’s cut in the payout by two-thirds is part of a “reset” of the Anglo-Dutch group’s dividend policy, not a short-term measure, amid persistent concerns about economic growth and questions over future oil prices in a world that shifts towards cleaner fuels.
The company is taking the first steps of a “fundamental shift for Shell over the next 30 years”, chief executive Ben van Beurden told reporters, “balancing short-term needs with long-term goals” to become a net-zero emissions business by 2050. He said it was “hard to say” if oil demand would ever return to previous highs.
The first oil “supermajor” to cut its dividend, Shell reduced its quarterly payout to 16 cents per share from 47 cents. Shares in the company, which was the biggest dividend payer on the FTSE 100 in 2019, closed 11 per cent down on Thursday.
“Today is a very difficult day for the company,” said Mr 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.”
Net income adjusted for cost of supply — Shell’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.
Shell said the situation would be “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 do not expect a recovery in oil prices or demand for our products in the medium term,” Mr van Beurden added.
Energy consumption worldwide could drop 6 per cent in 2020, the International Energy Agency said on Thursday, equivalent to India’s total annual demand.
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 programme 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.
Mr van Beurden 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.
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 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.
Investors and activists have called on oil companies to take greater accountability for their role in enabling climate change and pivot to lower-margin greener investments, which had already put longer-term dividends in doubt.
“The decision to rebase the payout lower . . . will reopen the debate for BP and others,” said Stuart Joyner, analyst at Redburn.
Shell’s upstream earnings from oil exploration and production plunged 82 per cent in the quarter. Its gas earnings took a 17 per cent hit, while oil products and chemicals also reported falls in profits.
