Interactive Investor

Shell raises dividend, but Covid-19 and oil prices weigh on results

29th October 2020 11:20

Richard Hunter from interactive investor

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Oil major has kept a lot of financial plates spinning, but where has the pandemic left the company? 

Royal Dutch Shell (LSE:RDSB) lofty longer-term ambitions have been underlined by a revised cash allocation framework which aims to build on its previous financial engineering. 

The company had previously been pulling all the financial levers in its control to mitigate the impact of an oil price which fell 42% in the year to date.

Measured capital expenditure, a focus on costs including a reduction to the dividend as well as reduced operational costs and asset sales were already part of a plan to release an additional $30 billion (£23.06 billion). 

This target has now been ramped up, with the aim of reducing net debt to a figure of $65 billion from the current $73.5 billion, while at the same time increasing distributions to shareholders from cash flow. 

Alongside the framework lies the company’s energy transition strategy, which has come into sharp focus given the effects of the pandemic. 

The oil price suffered from over-supply and crippled demand as aircraft stood idle. Travel also reduced to a trickle and manufacturing all but ceased during lockdown.

But the crisis seems to have focused the collective mind on the need for alternative energies generally. 

For its part, this remains a core part of Shell’s multi-decade aims, such as the aim of becoming a net zero emissions business by 2050 or sooner.

The quarterly numbers reflect that much of the medicine was taken in the previous quarter in terms of impairments, with the swing to a profit of $489 million comparing to a loss of $18.1 billion in the second quarter. 

However, in the context of the previous year’s third quarter profit of $5.9 billion, the economic severity of 2020 has been laid bare.

Shell has been spinning many financial plates for some time, and continues to do so. 

A 50% reduction in quarterly revenues has been partially offset by a 45% reduction in expenditure year on year, although at 31.4% the gearing number is far in excess of the long-term target of 25% and explains the focus on reducing net debt.

Meanwhile, the company’s prodigious ability to generate cash enables a progressive dividend policy to be resumed, if not at previous levels. The projected yield should nudge around 7% given this announcement, which is clearly a punchy yield in comparison to many of its blue chip peers. 

Some of this elevated figure will be accounted for by the sharp decline in the share price, but the new policy, which should include share buybacks, would be supportive to the price.

Indeed, this would be a welcome development. The shares are down by 59% so far in 2020, and over the last year have fallen 62%, as compared to a decline of 23% for the wider FTSE 100

Given the relentlessly uncertain outlook for the global economy and indeed the oil price, the market consensus for Shell has recently reduced to a ‘hold’, albeit a strong one, with BP (LSE:BP.) for the moment taking on the mantle of the sector’s preferred play.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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