Shell defies earnings plunge with raised dividend

Royal Dutch Shell raised its dividend despite reporting a plunge in annual earnings to the lowest in at least 15 years, as the oil industry reels from the effects of the pandemic.

The company’s 2020 net income adjusted for one-off factors and cost of supply — Shell’s preferred profit measure and the one tracked most closely by analysts — fell 71 per cent to $4.8bn, from $16.5bn in 2019. That is the lowest since the company’s creation in 2005 through the unification of Royal Dutch and Shell Transport.

The Anglo-Dutch oil major reported an annual loss of $21.7bn, a number that reflected a hefty post-tax impairment figure as Shell reassessed long-term energy prices and asset values in light of the coronavirus crisis and its strategy for the energy transition. That was the company’s first-ever headline loss and one of the biggest in the UK’s recent corporate history.

Shell shares fell 1.5 per cent in early trading on Thursday in London.

The pandemic and the resulting collapse in oil demand have wreaked havoc on majors’ balance sheets just as European groups are seeking to generate more cash to plough into lower-carbon energy and technology.

For the three months to December 31, Shell’s adjusted net income dropped 87 per cent to $393m. That compared with $2.9bn in the same period a year ago and fell short of analysts’ estimates of $597m.

Even though cash flow fell 40 per cent against a year earlier and net debt rose to $75.4bn from the prior three months, Shell decided to raise its dividend for a second time in recent months.

A dramatic two-thirds cut to the payout last April to 16 cents, the first since the second world war, was met with shareholder ire and the company’s share price dropped to a multi-decade low later in the year.

As Shell sought to woo back investors, it raised the payout to 16.65 cents in October and has said it will again raise the dividend by 4 per cent to 17.35 cents a share in the first quarter of 2021.

“We are coming out of 2020 with a stronger balance sheet,” said Ben van Beurden, chief executive, on Thursday. “We are committed to our progressive dividend policy.”

While the company has championed its robust cash flows and performance despite an unprecedented year, its finances and corporate strategy are under huge scrutiny.

Oil prices have recovered from 2020’s 18-year lows to more than $55 a barrel but they are still below the $70 level at the start of 2020, with companies still feeling the impact of the coronavirus crisis.

Mr van Beurden said the energy demand outlook was a “bit of a mixed picture”.

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Shell, which is trying to navigate the twin challenges of the pandemic and the shift towards lower-carbon energy, is due next week to elaborate on its plan to achieve net zero emissions, meaning it will offset any greenhouse gases it cannot eliminate. 

The company was under pressure before coronavirus as the global economy worsened and refinery margins weakened. It was then forced to suspend its buyback programme, slash spending by billions of dollars, issue bonds, reduce costs and cut thousands of jobs.

Once the company hits its net debt target of $65bn, Shell said it would aim to distribute 20 per cent to 30 per cent of cash flow from operations to shareholders through dividends and share buybacks.

Sven Reinke at Moody’s Corporate Finance said: “By hiking the quarterly dividend by 4 per cent, Shell relies more heavily on a market recovery in 2021-22 to achieve its targeted net debt reduction to $65bn.”

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