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Shell Dividend Cut a Reality Check for Big Oil

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Royal Dutch Shell's decision Thursday to slash its quarterly dividend by two-thirds marks a major reality check for Big Oil. Seen as sacred by oil majors and their investors alike, dividends are not to be tampered with in normal times. But Shell's move demonstrates that some oil executives, at least, have woken up and realized that the current market crisis really is different than past downturns. Shell cut its dividend by 66% to 16¢ per share for the first quarter of 2020, a move that will save it some $10 billion per year in cash distributions to shareholders. For a company that had already decided in March to reduce capital expenditures by $5 billion per year and cut annual operating expenses by $3 billion-$4 billion, the cut -- Shell's first since the World War II -- seems drastic. But as Shell CEO Ben van Beurden told reporters on the company's first-quarter earnings media call, "had we not cut the dividend … we would have been left without options to reposition the company for the recovery and for the future." What does Shell's move say about other European majors, such as BP and Eni, who chose not to cut their dividends after ugly first-quarter results? They may be guilty of wishful thinking and perhaps even sanguine about prospects for a V-shaped economic recovery from the Covid-19 downturn. Shell is not the first European major to announce a dividend cut: Equinor broke ranks with its peers when it made its own 67% dividend cut on Apr. 23 (PIW Apr.24'20). But that Europe's biggest oil and gas major decided to cut its dividend reflects a view that global energy consumption patterns might be permanently altered by Covid-19 after widespread lockdowns are lifted, requiring firms have enough capital flexibility to adapt strategically (related). Shell CFO Jessica Uhl said that the $20 billion of additional financial flexibility, achieved via capex and operating expenditure cuts, the dividend reduction and better management of working capital, is needed in the context of "the incredibly uncertain environment that we're operating in." By contrast, Eni CEO Claudio Descalzi said on the Italian company's recent earnings call: "We are assuming the lockdown until the end of May and then a gradual demand recovery toward normality by the start of 2021." When it comes to break-even prices Uhl refused to give a number, although analysts at Wood Mackenzie said it estimated that the dividend cut reduces Shell's 2020 cash-flow break-even oil price from $51 per barrel to $36/bbl. The break-even that BP is targeting for next year is $35/bbl. Eni sees oil averaging $45/bbl this year before returning to $55/bbl in 2021, which looks very punchy given where Brent is currently trading. What happens now that Europe's top major has shocked the market and got the dividend monkey off its back? It appears inevitable that the other majors will follow suit, given the massive cash crunch they all face -- unless they are willing to ruin their balance sheets by heaping on more debt. Shell stock was down about 10% Thursday, and it likely weighed on rivals BP and Total, which were off 5%-6%. Before first-quarter results season started, some analysts thought majors would wait at least a couple of quarters to pass before examining dividend cuts. Indeed, they were expected to cut everything but the dividend. But Shell has shown that pulling these other levers might be insufficient to get majors through this crisis and navigate a potential new era of lower energy demand. Meanwhile, more pain for these companies and their employees could come: Uhl emphasized during Shell's Apr. 30 call with the press that the levers Shell has pulled so far may only be the company's first set of actions.

Topics:
Oil Demand, Earnings
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