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Royal Dutch Shell - dividend cut by 66%

Emilie Stevens, Equity Analyst | 30 April 2020 | A A A
Royal Dutch Shell - dividend cut by 66%

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Royal Dutch Shell Plc B Shares EUR0.07

Sell: 1,359.60 | Buy: 1,360.20 | Change 13.40 (1.00%)
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Royal Dutch Shell has cut their interim dividend from $0.47 per share to $0.16 per share. The board said it wouldn't be prudent to maintain the previous payout given current oil prices, economic uncertainty, uncertain demand and market volatility. The share buyback programme has also been suspended.

First quarter revenue fell 28.8% year-on-year to $61.0bn, and profit before taxes fell 93.4% to $623m. After tax the group made a loss of $23m, compared with a $6.2bn profit last year.

The shares fell 7.2% in early trading.

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Our View

The collapse in oil prices has sent a shockwave through the oil industry. It started with a massive surge in Saudi Arabian supply, when the production agreement between Russia and oil cartel OPEC broke down. But the challenges have now shifted into demand too as the coronavirus outbreak sees economies grind to a halt and fuel use fall.

Oil majors like Shell are better placed than smaller rivals, but this is still cripplingly bad news for profits. Underscoring the severity of the situation, management have felt the need to cut the dividend for the first time since WWII. The language of a "reset" indicates that this may be a permanent reduction and not a temporary measure. If so, using the closing price before this announcement, we make the prospective yield around 3.4%.

To put it frankly, many investors hold Shell for the dividend and it may now end up paying out less that the overall market. This is likely to seriously diminish Shell's attraction for many investors, and may cause the share price to fall until the yield gets more attractive.

The root of the problem is that, at around $25 a barrel, the price of Brent crude oil is some 60% below last year's average. With lower demand likely to hit the downstream - which includes the production and sale of oil derivatives and petrol stations around the world - there's a genuine risk that current losses deepen if these prices persist.

There's nothing Shell can do to influence the price of oil though. Just as the crash came out of the blue, predicting the path of a recovery is likely to be equally thankless. An agreement between OPEC and Russia could be just what's needed or it may still fail to offset the fall in demand. Instead management are, quite rightly, focussing on the things they can control.

Shell is taking a hatchet to the cost base, and plans to take around $3-4bn off operating costs over 12 months and 20% off planned capital investment. Keeping the balance sheet in good health may yet require further asset sales, even after reducing shareholder returns.

In the long run the cash freed up may, if oil prices recover, help the group transition away from fossil fuels. We think this is probably a long way off though, and relies upon a profitable core oil and gas business for funding.

Shell certainly faces a tough few months ahead, if not longer. However, once the world economy recovers from COVID-19 we think demand for oil will strengthen again.

The rub for CEO Ben van Beurden is that after a certain point the group's future is out of his hands. Shell's resources are immense but not infinite, and the group needs higher oil prices before it can get back onto the front foot.

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First Quarter Results

Total production fell 1% in the quarter to 3.7m barrels of oil equivalent a day (boepd). Meanwhile average global liquid prices fell 19% to $46.53 per barrel and natural gas prices fell 20%. Underlying profits fell 48% to $2.8bn.

Integrated Gas underlying profits fell 35% to $1.8bn, reflecting lower prices, losses on hedging contracts and adverse currency movements on deferred tax due in Australia. Production rose 12% thanks to fewer maintenance activities and ramp ups in Trinidad and Tobago and Australia.

Upstream also struggled with lower prices and asset write downs, especially in Brazil and the US. A similar currency issue affected deferred taxes in Brazil. The division generated an underlying loss of $863m, compared with a $1.6bn profit last year.

The Oil Products division made $2.2bn in underlying profits, up 81% on last year. This primarily reflects a $966m dollar gain on hedging contracts. Excluding such gains, underlying profits fell 6% to $1.3bn. This reflects lower refining margins, crude trading profits and unfavourable movements in deferred tax positions.

Underlying Chemicals profits fell 68% to $146m, reflecting weaker margins and higher costs. Headline Corporate costs reached $989m, partially offset by a gain resulting from a weaker Brazilian real on financing positions. Including such gains corporate costs were $453m.

Capital expenditure during the quarter fell 11.3% to just under $5.0bn, and gearing fell to 28.9% from 29.3% at the end of 2019. Organic free cash flow was $10.3bn during the quarter.

Shell intends to cut capital spending in 2020 from a planned $25bn to under $20bn. In addition, management intends to reduce operating spending by $3-4bn. Management highlighted coronavirus related uncertainties in the second quarter of the year, which may negatively impact results.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.