Royal Dutch Shell has announced it will cut its shareholder dividend as it struggles to preserve its cash reserves, a move unseen since World War Two from the petro-giant.
An oil war between Saudi Arabia and Russia, combined with the coronavirus pandemic has sent the price of oil into a freefall in recent weeks, which has caused Shell to reduce its oil and gas output by around one-quarter, after its net profit halved in the first quarter of 2020 to $2.9 billion.
Shell is anticipating that its new measures, in addition to cuts in its capital spending and anticipated cost-cutting measures that were unveiled last month would save the company around $30 billion by the end of the year. The company’s share price has dropped a dramatic 8%, falling behind its competitor British Petroleum - BP - which has said it’s on target to maintain its first-quarter dividend.
Chief Executive Officer, Ben van Beurden has said that “we are living through a crisis of uncertainty… if we had not cut the dividend, we would have been left without options to reposition the company for the recovery and the future.”
Van Beurden says the move will help Shell in funding its long-term vision for the company, and also play a pivotal role in moving the company away from fossil fuels and into low-carbon energy sources and renewable technologies. He also said that the true impact of the oil market will be felt when companies release their second-quarter results, while Chief Financial Officer, Jessica Uhl said Shell was preparing for the recession to extend until 2023.
Shell is the world’s largest petroleum retailer, with a total of 45,000 stations; the company anticipates fuel sales to deteriorate by 54% in the second quarter of 2020. It has reduced its oil refining capabilities by 40% and expects its oil and gas production numbers to drop from 2.7 million barrels to anywhere between 1.75 and 2.25 million.
Reuter’s Ron Bousso and Shadia Nasralla have written that “for years, Shell has taken pride in having never cut its dividend since the 1940s, resisting such a move even during the deep downturns in the oil market of the 1980s.”
Shell said it would cut its quarterly dividend from 47 cents per share to just 16 cents per share, which is estimated to save the company around $10 billion this year, if the market remains at current levels.
The last time Shell adjusted its shareholder dividends, it raised them.
The company paid $15 billion in dividends last year to shareholders making it the world’s second largest payer after Saudi Arabia’s Saudi Aramco. Dividends paid by Shell and BP alone last year accounted for 24% of the $94 billion of dividends paid by FTSE 100 companies.
The move is an important one, considering that Shell is the first of the world’s biggest oil manufacturers - often referred to as the Oil Majors - to cut its dividend in the wake of the pandemic. Exxon Mobil and BP have said they will maintain their dividend, while Total and Chevron are yet to announce their first-quarter results.
Tom Ellacott, an analyst with Wood Mackenzie told Reuters that “Shell’s dividend cut has thrown down the gauntlet to the supermajors. BP, Chevron, ExxonMobil and Total are due to pay out $41 billion of dividends in 2020.”
Wood Mackenzie says the cuts will allow Shell to generate cash, even with oil at $36 a barrel, down from $51. Brent crude oil has fallen 65% in 2020, trading at $25 a barrel earlier this week.
This comes amid growing shareholder pressure being placed on oil and gas companies that are concerned about climate change. Shell earlier this month revealed a ground-breaking strategy that would see the company reduce its greenhouse gas emissions to net zero by 2050; the first of any of the major fossil fuel producers.
Tal Lomnitzer, senior investment manager at Janus Henderson Investors has said that “ripping off the band-aid always hurts, but if Royal Dutch Shell’s move today allows more room for alternative energy investments, and facilitates a lower cost of equity, it could be just what the company needs to ensure its long-term health.”
The International Energy Agency said earlier this week that global energy demand is expected to drop by around 6% in 2020, the largest contraction in history. In response, last month Shell has said it would reduce its capital expenditures by $5 billion from $25 to $20 billion, but now those cuts have been increased by a further $4 billion over the next twelve months.