RDSA Shell Plc

By Sarah McFarlane 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 1, 2020).

LONDON -- Royal Dutch Shell PLC cut its dividend for the first time since World War II as a steep drop in oil demand upends what has long been a fundamental bargain between oil majors and their investors.

Shell's move comes amid a historic oil-price rout as swaths of the global economy switch off and demand plummets. But it also comes at a time when the energy sector had already fallen out of favor with many investors amid concerns that climate change could force an energy-mix shift away from hydrocarbons. That has prompted major oil companies to increasingly promote their reliable, generous dividends.

Shell on Thursday cut its dividend for the first time since 1945, reducing it by 66% to 16 cents a share after first-quarter profit fell by nearly half. The company warned that the pandemic's impact would be more severe in the second quarter.

It was a tough decision, but the dividend wasn't sustainable, said Chief Executive Ben van Beurden.

"It's also not wise or prudent or even responsible to pay out a dividend if you know for sure that you have to borrow for it, deplete your liquidity and, at the same time of course, also reduce the resilience in a world that is going to be totally unpredictable for some time to come, " he said.

Shell's move followed a dividend freeze by Exxon Mobil Corp. on Wednesday, signaling it may break its decadeslong run of annual dividend increases. Earlier in the week, BP PLC maintained its dividend after increasing it in February. "Shell's dividend cut has thrown down the gauntlet to the supermajors," said Tom Ellacott, analyst at consulting firm Wood Mackenzie, adding that BP, Chevron Corp., Exxon Mobil and Total SA are due to pay out $41 billion of dividends in 2020.

Oil companies moved quickly to cut costs as coronavirus spread globally. Most large oil companies have held off on cutting dividends. Last week, Equinor ASA of Norway cut its dividend by 67% to 9 cents per share. In March, Houston-based Occidental Petroleum Corp. cut its dividend by 86% to 11 cents per share.

"No CEO wants to have on their track record a cut to the dividend that indeed is iconic in the market, however the situation that we are facing at the moment is also totally unprecedented," said Mr. van Beurden.

In the U.K., Shell and BP combined paid one in every GBP7 to GBP8 of the FTSE 100 dividend last year, said Jason Kenney, an analyst at Spanish bank Santander.

"This means U.K. pension funds...and savers already hit by weak interest rates in the U.K. will need to reassess income options on a medium-term, long-term basis."

In March, Shell cut its investment plan to $20 billion for 2020, from the previously budgeted $25 billion, and halted its share-buyback program.

"The move will allow Shell to pivot more easily through the energy transition, and not to be tied to a $15 billion dividend to service each year," said Biraj Borkhataria, co-head of European energy research at RBC Capital Markets.

The Anglo-Dutch oil giant reported a profit on a net current-cost-of-supplies basis -- a figure similar to the net income that U.S. oil companies report -- for the three months ended Mar. 31 of $2.76 billion, compared with $5.29 billion ia year earlier.

Shell joined BP in signaling lower refining margins and refinery-capacity usage for the second quarter. It expects oil and gas production to fall in the coming quarter due to the pandemic, along with its oil-product sales. The company said falling demand, regulatory requirements or constraints on infrastructure could lead to further cuts to oil and gas production.

Shell's gearing level -- its net debt as a percentage of total capital -- remained at around 29%, in line with the fourth quarter, but above the company's target of 25%.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com

(END) Dow Jones Newswires

May 01, 2020 02:47 ET (06:47 GMT)

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