Shell's Dividend Cut Is Harsh but Fair -- Heard on the Street
April 30 2020 - 10:14AM
Dow Jones News
By Rochelle Toplensky
Shell is thinking long term. Its shareholders will need to do
the same.
On Thursday, the energy giant cut its dividend by two-thirds --
a shock move for a dividend stalwart that hadn't cut its payout
since World War II. But faced with this "crisis of uncertainty,"
Chief Executive Ben van Beurden said it was "unrealistic and maybe
even irresponsible" not to act.
Europe's largest oil-and-gas producer seems to be signaling that
today's ultralow oil prices are the product of no ordinary cycle.
Instead, the company is owning up to enduring challenges, including
the need to adapt to the lower-carbon future envisioned by the
Paris accord.
The shares dropped 8% in morning trading. There could be more
pain to come as dividend investors sell out to peers who are less
hungry for cash returns.
The near-term outlook is undeniably grim. Energy demand has
fallen by an "unprecedented" 6%, according to the International
Energy Agency -- the equivalent of what India, the world's
third-largest consumer, uses in one year. Falling demand is paired
with excess supply: A price war between Saudi Arabia and Russia
kicked off a plunge in oil prices that these two big producers now
seem powerless to control.
The issue is wider than oil: The lockdown has reduced demand for
coal, gas and even power, too. China has now eased its
restrictions, and Europe and the U.S. might soon follow suit. But
it is still anyone's guess what sort of recovery is in store.
Other European companies that investors buy for cash returns
have suspended or cut their dividends -- notably banks, which faced
regulatory pressure. But despite being at the heart of the crisis,
most big oil producers are expected to stick to their payouts. BP
this week added to its debt to continue to fund its dividend. They
are betting that the situation resolves quickly and better times
lie ahead.
Dividends have become an increasingly important buttress to the
case for investing in big oil companies as the market has fallen
out of love with fossil-fuel producers in recent years. Some avoid
the shares because of their contribution to global warming. For
others, the prospect of widespread decarbonization raises the risk
of stranded assets and peak oil demand in the near future -- big
changes for a sector that only a few years ago was worried about
running out of the black stuff.
Shell has been a leader among major oil companies in its
commitments to a low-carbon future. It even raised its ambitions in
the midst of this crisis. Danish company Orsted presents an
interesting example of what it might be trying to achieve.
Originally named Dong, the former oil-and-gas producer became a
green energy company in 2017 with the sale of its fossil-fuel
assets. Since then, its valuation has leapt ahead of fossil-fuel
peers.
Such a shift from fossil fuels to low-carbon energy is slow,
complex and highly uncertain, particularly for a giant such as
Shell. But returns on oil and gas are no longer such a sure thing.
Shell's dividend cut should help keep it on a solid footing through
this crisis and prepare for the future, which is in investors'
long-term interest. Its peers would be wise to follow suit.
Write to Rochelle Toplensky at rochelle.toplensky@wsj.com
(END) Dow Jones Newswires
April 30, 2020 09:59 ET (13:59 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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