For Ben van Beurden, the decision to cut Royal Dutch Shell’s dividend for the first time since the 1940s was difficult but necessary to preserve the long-term health of the company he runs. Investors, however, are not all convinced.
The oil supermajor is battling an unprecedented demand and price collapse triggered by coronavirus. But Shell is only too aware that the crisis is ushering in “a new reality”.
Economic uncertainty could last years, as could lower and less stable commodity prices, all as pressure mounts from investors and climate activists to divert funds away from fossil fuels. The $10bn it will save this year from the payout cut could help buffer the financial distress.
“I hope investors will be with us and say we are effectively protecting their interests and the company as well,” said Mr van Beurden on Thursday.
But shares in Shell, the biggest dividend payer in the FTSE 100 last year, fell 11 per cent on Thursday. And the investment case for oil is coming under greater scrutiny.
Mr van Beurden warned that oil demand might already have peaked. He said now, more than ever, the company needed to reposition for the future.
Mark Lewis, head of climate change investment research at BNP Paribas, said there was “tremendous symbolic importance” to Shell’s dividend cut, adding: “What does this mean going forward as to whether oil and gas companies continue to be viewed as reliable income stocks?”
Until now, even as concerns have grown among big shareholders over oil companies’ role in enabling climate change and the likelihood of vast swaths of energy assets becoming uneconomic, the sector was embraced as a consistent source of large dividends.
But with the oil price hitting its lowest level in 18 years last week and companies preparing for a protracted downturn, there are fears Shell’s cut, which follows a similar move by Norway’s Equinor, could pave the way for its biggest rivals to do the same.
Few oil divisions are able to generate returns at today’s crude prices around $25 a barrel. Companies are already cutting spending drastically, borrowing heavily, delaying new investments and suspending shareholder buybacks. Yet this is not proving enough to bolster cash flows.
So dividends could be next. With BP, Chevron, ExxonMobil and Total due to pay out $41bn this year, according to analysts at energy consultancy WoodMackenzie, their combined savings would amount to $27bn if they matched Shell’s cut.
Shell, BP and Total ranked among the top five dividend-paying stocks in the MSCI Europe index last year, according to UBS, although the bank said energy companies had been overtaken by banks since 2007 as providers of the largest chunk of Europe’s dividends.
But if companies curb their payouts without showing they can remain financially robust as they shift towards greener businesses, concerns will mount over Big Oil’s place in investment portfolios.
Fabiana Fedeli, global head of fundamental equities at Robeco, said the investment case for oil “has already structurally changed” and the pandemic was a further “wake-up call”. While there will be investors in big oil, among the companies “there will be winners and losers”.
Shell, like rival BP, believes it can do it all, catering to persistent demand for oil and gas that still dominate the energy mix while ploughing funds into low-carbon technologies.
Bernard Looney, BP chief executive, told the FT this week that the pandemic “only adds to the challenge for oil in the future”, and that climate change and the pressure to overhaul traditional businesses was not going away.
Some analysts have said Shell is right to reset dividend policy in preparation for a time when companies turn to greener, lower-margin businesses.
Tal Lomnitzer, a portfolio manager at Janus Henderson Investors, said rebasing the dividend was akin to “ripping off the band aid”.
“If Royal Dutch Shell’s move today allows more room for alternative energy investments, and facilitates a lower cost of equity, it could be just what the company needs to ensure its long-term health,” he added.
But pursuing hybrid strategies is a gamble and not all investors believe oil companies should pivot away from hydrocarbons.
Nick Stansbury, head of commodity research at Legal and General Investment Management, the UK’s largest asset manager, said investors had long relied on oil dividends to damp the volatility of commodities and create a “very stable stream of income”.
“If this is not a one-off but a direction of travel [across the whole industry], that is a really big deal. It is an entire industry saying ‘this role we have played for you, we’re sorry but we can’t play that any more’,” he added.
Some investors want more detail from Shell. “They need to outline where they are going to spend the money they will generate,” said Simon Gergel, chief investment officer for UK equities at Allianz Global Investors.
Still, with companies across the world slashing dividends — and mounting political pressure for them to do so — there are few options to replace oil groups.
As one top 20 investor in Shell said: “This definitely makes the stock less attractive by definition, but in the current climate where else do investors go?”
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
