Shell dividend cut puts Big Oil investment case in focus – Financial Times

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?”

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