Historic dividend cut sign of the times for Shell
THE crisis in oil markets started with a massive surge in Saudi Arabian supply when the production agreement between Russia and the Opec oil cartel broke down.
But demand has begun to flag as coronavirus sees industry, air travel, manufacturing and transport fall, and fuel use drop as a result.
Brent crude oil is currently kicking around at about $26 a barrel, which isn’t enough for many oil firms to make a profit. Unfortunately for Royal Dutch Shell, that includes them.
Majors like Shell and BP are better placed than smaller rivals, but this is still a sticky position to be in. Shell’s management have cut the dividend for the first time since the Second World War, which should bring home the gravity of the situation.
What’s more, the language of a “reset” indicates that this may be a permanent reduction and not a temporary cash-saving measure.
Many investors hold Shell for the dividend and it may now end up paying out less than the overall market. This is likely to seriously diminish Shell’s attraction for many.
Fundamentally, there’s nothing Shell can do to influence the price of oil. Just as the crash came out of the blue, predicting recovery is likely to be equally thankless.
A rapprochement between Opec and Russia could help, or it may fail to offset the fall in demand. Instead, management are focusing on the things they can control. This means taking a hatchet to the cost base.
It plans to cut operating costs by $3-4billion (£2.4-£3.2billion) over the next year and investment is being trimmed. Keeping the balance sheet in good health may require asset sales. Long-term, Shell needs a profitable core business to get back on track and eventually fund the transition to renewable energy.
We think oil prices will eventually recover, but the big question is: when? Either way, shareholders are now getting a much smaller dividend while they wait.
“This article is designed for investors who make their own decisions without advice. If unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”