Shell casts doubt over buyback plans

Big Oil investors are shaken after Royal Dutch Shell sounds a note of caution about share buybacks.

A big earnings boost for Royal Dutch Shell (LSE:RDSB) was more than overshadowed today as the oil giant cast doubt over the pace of its mammoth share buyback programme.

The Anglo-Dutch company said the prevailing economic conditions had created uncertainty over its financial goals, which include a reduction in gearing to 25% and completion of $25 billion of buybacks by the end of next year.

Shell's comments are another worrying sign for Big Oil investors after BP (LSE:BP.) appeared to suggest this week that it may delay any increase in its dividend into next year. BP clarified a day later that no decision had been made about the pay-out.

Shares in Shell slumped 4% despite today's better-than-expected results, while BP is also lower across the week after falling another 1% today. 

Both companies are enduring a period of lower oil prices, although Shell showed in its third quarter results that it is benefiting from recent efforts to reshape its portfolio.

Earnings of US$4.77 billion on a current cost of supplies basis were 15% lower than a year ago but 22% ahead of the City's consensus. This reflected stronger contributions from LNG and oil products trading, as well as higher realised margins in retail.

The result should help to banish memories of a poor performance in the previous quarter, when profits came in 30% short of expectations. Shell, which is easily the biggest dividend payer in the FTSE 100 index, is continuing to generate impressive levels of cash and has so far bought back $12 billion in shares for cancellation since the summer 2018.

It recently set out plans for the 2021 to 2025 period involving potential total shareholder distributions of $125 billion or more in the form of dividends and share buy-backs. This compares with the $90 billion expected for the current five year period to 2020 and $52 billion in shareholder distributions in the period 2011 to 2015.

These forecasts are based on free cash flow reaching $35 billion for 2025 at $60 US dollars a barrel, compared with between $28 billion and $33 billion for the current five-year period.

It will need its upstream business to continue pumping out the strong cash flows if it is to meet these new promises, as well as fund expansion towards low-carbon energy such as biofuels, hydrogen, wind and solar power. Cash flow from operating activities for the third quarter was $12.2 billion, a rise of 11% on the previous three months.

Gearing, which is net debt as a percentage of total capital, still rose to 27.9% from 27.6% in the previous quarter. Slower demand for oil and gas means that getting to the 25% figure will be much more of a challenge for the company.

CEO Ben van Beurden said:

"The prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback programme within the 2020 timeframe."