“Never Sell Shell” adage goes into the dustbin , IOC future in doubt

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“Never Sell Shell” adage goes into the dustbin , IOC future in doubt

By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk

The historical adage of financial analysts, pension funds and institutional investors never to sell Shell has been broken

With a surprise statement to the financial world, the Dutch-British oil giant has changed its dividend policy with a bang, removing part of the attraction to institutional investors. For the first time since 1945 Shell has cut its first-quarter payout by two-thirds amid corona-virus crisis.

Shell cuts dividend for first time since WW2

The FTSE largest dividend payer has decided to cut its dividend due to the collapse of global oil prices due to the corona-virus pandemic. At present financial centers are reeling from the news, as the Shell dividend was a major basis to hold the company?s shares for thousands of retail investors and pension funds. In a reaction Shell?s CEO Ben van Beurden, stated that the company would take ?prudent steps? to protect its financial resilience ?under extremely challenging conditions? caused by Covid-19.

One of the main underlying issues for the dramatic decision by Shell are the dramatic financial figures reported for Q1 2020. In its financial statement the IOC reported that its profits in Q1 tumbled by 46% to $2.9bn (?2.3bn), in comparison to $5.3bn in Q1 2019. Van Beurden reiterated that the dividend cut is based on the need to address the continued deterioration in the macroeconomic outlook and the significant mid- and long-term uncertainty.

He also said that it was meant to bolster the company?s resilience, underpin the strength of Shell?s balance sheet and support the long-term value creation. The company still will pay out a total dividend of $3.5bn for the quarter to its shareholders.

Shell?s move has come at a difficult time

As the financial world is fully focusing on the impact of Corona, the global lock-down and expected negative economic growth for 2020. At the same time, Shell?s competitors, such as British oil giant BP, are not yet deciding to cut their dividend. Bernard Looney, BP?s CEO, stated this week that the board had decided not to cut its dividend for the first quarter despite plunging to a loss. The BP executive however has indicated that there could be dividend cuts coming if the current situation deteriorates further.

Shell?s decision will have shocked its shareholders, especially the retail investors, but also pension funds, as most of them will have been counting on the historical payouts for their total investment returns. The fact that Shell has decided to go this way is a real sign that the privately owned oil and gas sector is fighting for its survival.

Whatever optimism is still there in the market, the last 24 hours partly supported by better than expected storage figures in the USA, will disappear for sure when investors and analysts start to understand that the situation is very dire. Large IOCs and independents will be able to survive the current onslaught, due to their balance sheets and cash available, but the future of others, especially high-cost producers, will be very dark.

The Shell move is not a one-time issue, it is a sign that investors are entering a new world. Without the attractiveness of high dividend pay-outs, the overall attractiveness is becoming bleak. If the Shell example is going to be followed by others, institutional investors and retail investors will for sure have a look at their total portfolio in oil and gas, and most probably will head to other sectors based on ROIs and other issues.

Lower investment attractiveness is a real threat, as future investment strategies of IOCs and Independents will depend on the views held in the market. If returns are threatened, and a sacrosanct Shell dividend is removed, financing costs for most will increase substantially.

Another still undervalued issue of most IOCs and Independents could now also for once emerge on the desks of analysts. Most privately owned oil and gas companies have no real reserve potential to build a future on. If there is no change in attitude at the HQs of the likes of Shell, BP, ExxonMobil or Statoil, these companies are going to fight an uphill battle they will lose.

With an average of 3-5 years of reserves/production ratios, most are in dire need to find or acquire more reserves to prolong their life. Cutting dividends is dramatic, blood is on the wall in investment land, but if Shell and others are not going to invest in upstream assets right now, as prices are attractive, more blood is going to be spilled.

By Dr. Cyril Widdershoven for FX Empire