A FTSE 100 company announcing cost-cutting measures is hardly surprising right now. But Royal Dutch Shell left something out of its Monday update: the dividend. Adjusting to a tremendous collapse in the Brent crude oil price — down by almost half in just one month — tests the mettle of all oil producers. Yields have ominously soared into the mid-teens. But do not assume this signals dividend reductions.
A reassuring message pushed shares up 5 per cent on Monday. “Shell has weathered market volatility many times in the past,” said chief executive Ben van Beurden. In the previous oil bear market, Mr van Beurden had to contend with lower crude prices and took the gamble of acquiring rival BG Group for £35bn ($50bn). Even after all that, Shell still did not cut its payout.
Expect the oil company to hold on this time, too. A series of measures designed to preserve cash flow have been announced, including operating expense reductions of as much as $4bn from last year, plus a fifth off the capital spending plan down to $20bn. Shell will halt its share buyback, after the current tranche of $1bn has been completed, saving another $3bn. The total — perhaps $12bn — only covers part of its dividend needs, which last year was just over $15bn.
Although the cash-saving measures announced may look short, there is one more boost coming to operating cash flow. Falling commodity prices will dent profits. But the group holds lots of crude, petrol and diesel in its inventories. As the value of this stock plummets, working capital is released. That in turn boosts operating cash flow — counter-intuitive as it might seem.
Estimating the lift to cash flow this year is tricky. However, in 2014-2015, when Brent fell from $100 to $42, inventory made a $13.5bn difference to operating cash flow, points out Société Générale. This admittedly one-time release will help forestall any need to cut the dividend. Total, the French oil producer, also announced a series of cost-saving measures on the same day, without any dividend cut. A release of working capital should help it as well.
Both Shell and BP may have one other reason to hold the dividend: community pride. The same pensioners threatened by coronavirus depend on Shell and BP for income. The two companies account for 18 per cent of FTSE 100 dividends. Europe’s largest oil producers should be able to deliver this year.
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