Shell it cut its Q66 2020 dividend by 16% to 15 cents per share. The Anglo-Dutch company announced on Thursday it would cut payouts from $5 billion last year to $XNUMX billion this year. A cut of this kind hasn't happened since the end of the Second World War. The Norwegian State Company Equinor did the same thing: cut the dividend by 67% to $0,09 per share versus $0,27 last year. The oil sector is being hit by an earthquake that has brought down prices in a vertical fall as not seen for many years: crude oil was quoted at 64 dollars/barrel in January, on the eve of the expiry of May futures contracts, on 20 April, it crossed the threshold of negative prices with the Texan WTi falling to -37 dollars/barrel.
The reasons behind the phenomenon - sensational but not unexpected - are now known: overload in storage, drop in global demand due to the coronavirus crisis, clash over production cuts within Opec Plus in an attempt to embarrass and oust from the market the producers of shale oil Usa, structural factors linked to decarbonisation.
All the Majors are reducing investments and reconsidering the already approved treasury share buyback plans. But as long as they are able to maintain the "aristocratic" dividends, among the highest compared to other sectors, insured so far? The question is at the heart of many analysts' concerns. Shell has decided to cut its dividend significantly, a historic decision. How should investors evaluate this phenomenon, how an opportunity or a disappointment?
If the last one asks Goldman Sachs reports which asks (and answers) five crucial questions for shareholders: 1) is the dividend cut a sign of balance sheet imbalance? "No. While the unprecedented slump in demand is placing tremendous pressure on the industry, Big Oil balance sheets are resilient, even as debt-to-capital employed ratios have peaked,” GS analysts explain.
Second question: is the decision appropriate for the shareholders? “We believe that a high payout is important to ensure cost and capital discipline in the sector, but we want to make the case for variable dividends as a tool to guarantee counter-cyclical spending, in line with some case studies in the mining sector”.
Question number 3: Will other companies follow Shell's lead? “Yes, it is likely that the example will be followed by other European oil companies even if the expectation is for more moderate reductions. 4) Is this the end of capital discipline? “No, we believe that correct capital discipline is structural in Oil & Gas companies in the era of Climate Change, with the prospect that an under-investment phase creates attractive dynamics in medium-term supplies in both Oil and Gas, especially in the Lng. And finally 5) Will all this lead to more M&A?”Yes, we believe the financial flexibility generated by lower payouts is likely to lead to more M&A, particularly in the Renewables/low carbon area” .
This is the responses of Goldman Sachs analysts who document how i break-even prices of the European majors, necessary to cover capex and dividends, have fallen by 60-70% from the peaks of 2014. In fact, estimates for 2020 indicate $41 in 2020 and $40& in 2021.
GoldmanSachs' analysis therefore proposes flexible dividends as a solution: higher when profits increase, lower when the cycle is less favourable, thus leaving room for investments in an anti-cyclical function. GS points out that European oil companies pay decidedly higher dividends than other listed companies, retaining a 30% reduction margin which would still leave them in a more profitable position compared to other sectors.
Eni has withdrew the 400 million buy-back proposal and it has also cut investments to deal with the consequences of oil plummeting to low levels and to secure the dividend. ExxonMobil and Chevron they have always paid increasing dividends, year after year. After a long hesitation that left shareholders in suspense, Exxon announced 30% cuts in Capex and reductions in operating expenses. For the first time since 2007, however, it did not raise its second quarter dividend, leaving it at 0,87 cents as in 1Q and assuring shareholders $1,74 at midyear vs. $3,43 paid for full-year 2019 . Chevron, Shell and Total they have initiated actions, in turn, intended to preserve the dividend for shareholders. The French company is expected to announce its decisions on May 5. But those who follow the sector wonder how long these measures will be sufficient to save 2020 dividends and how much the reductions in Capex will end up impacting the reduction in coupons.
