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 long-term reality for the energy industry.
Net income adjusted for cost of supply — its 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. Analysts had estimated $2.3bn.
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.
The Anglo-Dutch company, which is the first oil ‘supermajor’ to cut its dividend, said it will reduce its quarterly payout by two-thirds to 16 cents per share, from 47 cents per share. The company was the biggest dividend payer on the FTSE 100 in 2019.
Shares in Shell opened down 6 per cent after the news.
Ben van Beurden, chief executive, said: “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.”
The payout cut is part of a “reset” of its dividend policy, suggesting it is not a short term measure and that it is preparing for a prolonged downturn. It also comes as investors and environmental activists demanded oil companies take greater accountability for their role in enabling climate change, and pivot to lower margin greener investments, leading to questions over longer-term dividends.
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. It also announced at the start of the year that it would be likely to miss its debt reduction targets.
Since then, 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, in response to the pandemic. It also said its operating costs would decline by $3bn to $4bn.
Until now, oil companies had largely pulled on a series of financial levers, that also include issuing bonds and securing new credit lines, to safeguard their dividends. Yet analysts have said these measures are not enough to offset the hit to cash flows, putting dividend payouts at risk.
Earlier this week BP said it would maintain its dividend, despite a 66 per cent drop in first-quarter profits, but added that it would review the shareholder distributions in the second quarter.
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.
Shell had previously said it needed Brent crude prices to be $66 a barrel this year to meet its shareholder payout and debt reduction targets. The international benchmark is trading at 64 per cent below these levels around $24 a barrel — having hit an 18-year low last week.
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