April 30, 2020 / 9:55 AM / a month ago

Breakingviews - Shell’s dividend surrender is a necessary evil

The logo of Royal Dutch Shell is seen at a petrol station in Sint-Pieters-Leeuw, Belgium January 30, 2019.

LONDON (Reuters Breakingviews) - The great 2020 oil crash is now officially a crisis. Not because Covid-19 has caused an unprecedented drop in global demand, or because Brent crude prices have fallen by two-thirds and U.S. crude futures turned negative last week. Rather it’s because Royal Dutch Shell, has cut its dividend.

To put it mildly, the group’s slash - from 47 cents to 16 cents for the quarter - is unusual. Even after 2008 Shell maintained cash payouts, albeit with the option to receive stock. The last time the group didn’t pay cash dividends was in World War Two, and the last time it cut them - as opposed to a temporary suspension - was during the Great Depression, according to Bernstein.

Given that domestic rival BP chose to maintain its dividend on Tuesday, one interpretation is that Chief Executive Ben van Beurden either lost his nerve or is presiding over a flakier company. The Shell boss appeared to have some headroom: he’d already slashed 2020 capital expenditure to $20 billion and flagged $40 billion of cash and debt facilities with which to help finance the $15 billion cost of his annual dividend if need be. He could have tried to ride out the storm and maintain Shell’s dividend record.

Yet van Beurden can be forgiven for exercising caution. The opaque nature of recent cobbled-together cuts by the Organization of the Petroleum Exporting Countries and other producers make it difficult to say how closely output this year will stick to Shell’s current daily 3.7 million barrels. And even if prices stayed at their current level around $20 a barrel, net debt relative to total capital could have spiked appreciably above Shell’s 20%-30% comfort zone.

The decision also makes more sense against the backdrop of a transition away from oil. If Shell is serious about becoming a net-zero emissions company by 2050, it needs to make non-fossil fuel investments now. The move will reduce Shell’s dividend yield from above 10% to 4%, but the $10 billion of annual savings will safeguard capital spending and the credit rating. Given Norway’s Equinor last week also cut its dividend by two-thirds, it may not be long before BP looks like the outlier.

Breakingviews

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