Shell Drops the Ball After Boasting It Could ‘Do It All’

(Bloomberg) -- One year after Royal Dutch Shell Plc boasted it could “do it all,” its attempt to juggle a fat dividend, a $25 billion share buyback, debt repayments, and massive investments in energy projects is close to failure.

The culprit is lower prices of everything from natural gas to chemicals. Ben van Beurden, the company’s boss, dramatically slowed the buybacks and let debt increase well beyond his stated target. He also tightened the company’s belt on investment, and warned more cuts may be needed.

“There will be moments when there is a little bit more pressure in the system, like we are seeing at the moment, when frankly speaking all macroeconomic indicators are working against us,” he told reporters on a call on Thursday.

The admission resonates beyond Shell. Big payouts, whether as dividends or buybacks, are the only thing attracting many investors to Big Oil in a world increasingly aware of the impact of fossil fuels on climate change. Take one of those away, and the investment proposition starts to fade.

After van Beurden announced that buybacks would be scaled back, Shell shares sold off. The retreat is more than a tactical setback. It shows that the grand strategy that van Beurden and his head of finance, Jessica Uhl, designed may be a bit too ambitious.

Bolstered by a recovering oil market, rising refining margins and the benefit of the acquisition of gas giant BG Group, van Beurden made a pitch to shareholders: he would reshape Shell into a more climate friendly company, investing in electricity, while rewarding them handsomely.

Click here to read more on Shell’s buyback targets

It was a plan that had a flaw: it relied heavily on oil and gas prices not only staying high, but rising year after year, and the sale of billions of dollars in assets. When the market turned around, Shell was forced into a partial retreat.

“The debacle calls into question the wisdom of setting targets dependent on disposals and clearly reliant on a more favorable macro environment,” said Stuart Joyner at Redburn, a research firm. “Shell management now face a battle to re-set expectations and restore credibility.”

The plan to buy back $25 billion worth of shares by the end of 2020 is now in question and likely to be delayed into 2021 if the market doesn’t recover, van Beurden said.

Until now, Shell was repurchasing at least $2.5 billion worth of shares each quarter, but over the next three months, it told investors it would buy just $1 billion. If it continues at that rate, Shell won’t complete the buyback program until the middle of 2022. The company is also unlikely to meet its target to reduce debt. Spending in new projects, targeted at $24 billion to $29 billion, will fall to the lower end of the range this year.

Financial Juggling

Operationally, Shell has had strong quarter, ramping up oil and gas production. The company holds the largest natural gas liquefaction capacity and marketing portfolio of its peers, says Bloomberg Intelligence’s Will Hares. That makes Shell “best positioned to exploit favorable long-term global LNG demand fundamentals.”

But lower capital expenditure could put that into doubt. Decreased spending is translating into Shell finding fewer oil and gas reserves, which are the backbone of its long-term business, a sign, for some investors, that spending is too low. Shell disputes that view, saying its capex is $4 billion above what it needs to sustain the business.

The market isn’t so sure. “Six years of flat nominal dividends and six years of shrinking reserve life suggests a business that is struggling,” said Alastair Syme, oil analyst at Citigroup Inc. “Keeping all the financial balls in the air looks to rely on management maintaining investment at the low end of the range, but in turn we think that risks further deterioration in the future opportunity set.”

Shell’s share price suggests some investors are beginning to question future returns. The company is now trading at a level that implies a dividend yield over 7%, something extremely rare for a blue-chip stock like Shell.

Van Beurden is adamant, however, that payouts to shareholders are sacrosanct. Shell hasn’t cut its dividend since the end of the Second World War. “I think lowering the dividend is not a good lever to pull if you want to be a world-class investment case, so we’re not going to do that,” he said. “And it’s also not needed, to be perfectly honest.”

To contact the reporters on this story: Javier Blas in London at jblas3@bloomberg.net;Laura Hurst in London at lhurst3@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, Helen Robertson, Christopher Sell

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