Shell cuts dividend and first buyback tranche due to Covid-19
The oil major has cut its quarterly dividend by two-thirds, the first time since World War 2, as first-quarter profits slump 46%
London — Royal Dutch Shell cut its dividend for the first time since World War 2 on Thursday as the energy company retrenched in the face of an unprecedented drop in oil demand due to the coronavirus pandemic.
Shell also suspended the next tranche of its share buyback programme and said it is reducing oil and gas output by nearly a quarter after its net profit almost halved in the first three months of 2020.
Shell’s shares in London had slumped 7% by 7.53am GMT, sharply underperforming rival BP, which was down 2.2%.
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. Some investors, however, had called on major oil firms to break an industry taboo and consider cutting dividends, rather than taking on more debt to maintain payouts.
“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,” Shell chair Chad Holliday said.
He also said the cut in Shell’s payout was a long-term “re-set” of the company’s dividend policy.
Shell said it would reduce its quarterly dividend by two-thirds to 16c per share from the 47c it paid each quarter in 2019. If maintained for 2020 as a whole, Shell would save about $10bn.
Shell is the first of the five oil majors to cut its dividend because of the fallout from the coronavirus crisis. BP and ExxonMobil have said they will maintain their first-quarter dividends while Total and Chevron have yet to report first-quarter results.
The dividend cut also comes after Shell, this month, laid out the oil and gas sector’s most extensive strategy yet to reduce greenhouse gas emissions to net zero by 2050.
“The 66% dividend cut is a necessary evil to reinforce Shell’s capital frame and position it for the offence on the energy transition,” JPMorgan analyst Christyan Malek said.
Shell paid about $15bn in dividends last year making it the world’s biggest payer of dividends after Saudi Arabia’s national oil company Saudi Aramco. Dividends paid by Shell and BP last year also represented 24% of the £75bn in total paid out by companies in the FTSE 100 index of leading shares.
Following years of deep cost cuts after its acquisition of BG Group for $53bn in 2016, Shell had previously planned to boost payouts to investors through dividends and share buybacks to $125bn between 2021 and 2025.
Outside the oil majors, Norway’s Equinor became the first large oil company to cut its dividend in response to the current downturn, reducing its first-quarter payout last week by two-thirds.
Global energy demand could slump by 6% in 2020 due to coronavirus lockdowns and travel restrictions in what would be the largest contraction in absolute terms on record, the International Energy Agency (IEA) said on Thursday.
Shell said last month that it would reduce capital expenditure this year to $20bn at most from a planned level of about $25bn and also cut an additional $3bn to $4bn off operating costs over the next 12 months.
Its first-quarter net income attributable to shareholders based on a current cost of supplies and excluding identified items, fell 46% from a year earlier to $2.9bn, above the consensus in an analyst survey provided by Shell.
Shell’s fourth-quarter net income was also $2.9bn.
The company said it cut activity at its refining business by up to 40% in response to the demand shock.
Shell said it expects to cut production of oil and gas in the second quarter to between 1.75-million and 2.25-million barrels of oil equivalent per day (boed) from 2.7-million boed in the first quarter.
Shell’s gearing, or its debt-to-capital ratio, edged down to 28.9% in the first quarter from 29.3% in the fourth quarter, but was up from 26.5% in the same period a year earlier.