According to reports, OPEC agreed to cut oil production by 1.2 million barrels per day. As a result, the price of oil rose today. And over the short term, prices should continue upwards as the glut of oil is reduced. The long-term outlook is still open to debate, since the agreement may fall apart in a New York minute.
That being said, Royal Dutch Shell (NYSE:RDS.B) appears to be well positioned to continue its 7% dividend payouts. During the period of crisis for oil prices, instead of cutting costs and conserving cash flow, Shell did the unimaginable, acquiring BG Group for the hefty sum of $52 billion. At the time of the acquisition, everyone was wondering if Shell had lost touch with reality. Now in hindsight, it looks like Shell knew what they were doing, getting ready for the upturn.
It should be noted that Shell has a great track record where dividends are concerned: no reduction for the last seventy years.
The Big Wheels at Shell assert that the BG Group acquisition will begin to pay off when the price of Brent attains the $60 threshold. At the $60 mark, Shell's cash flow will be higher than it was when Brent was at $90 per barrel. Quantified, it goes like this: During the 2013-2015 time frame, Shell's cash flow was $12 million, at $90 per barrel. At $60 per barrel, Shell predicts its cash flow will be $20 million to $30 million over a similar three-year time frame, 2019, 2020 and 2021.
In other words, Shell is asserting it is capable of continuing 7% dividends over the next five years. And if the cash flow numbers prove out, dividend payouts might actually escalate during those five years. Higher oil prices, say $65 or even $75 per barrel, would augment free cash flow. Of course, whether that happens remains to be seen.
To an outside observer, this miracle appears to be in the category of walking on water. But a closer examination reveals it is not. The acquisition of BG Group made the miracle possible. Prior to acquiring BG Group, Shell was spending money like a sailor on leave. Shell was throwing money at projects that would take years to come to fruition. In 2013, Shell's capex was $57.5 billion; in 2014, the company's capex was $47 billion; and $36 billion in 2015.
The acquisition of BG Group allowed Shell to sustain production, while simultaneously reducing expenditures. In one fell swoop, Shell became the major player in the liquid natural gas market. And since demand for liquid natural gas is expected to rise in India, Mexico and China over the coming decades, Shell finds itself in the cat bird seat.
In other words, even without a substantial recovery in oil prices, Shell looks set to sustain dividends of 7%, because of its prominence in liquid natural gas.
And if that's not enough to bolster confidence in Shell's ability to sustain payouts, on Wednesday, the company announced an agreement to purchase Centrica's gas assets in Trinidad and Tobago, pushing Shell's share price up 4.16%. Moreover, analysts expect Shell's share price to hit $59.94 within the next year.
Then there's the rumor that Shell may unload its oil fields to Iraq for $30 billion. If it occurs, Shell will still be able to increase its earnings because of new start-up projects, such as Vito in the Gulf of Mexico.
All of the aforementioned evidence leads to the conclusion that Shell is laser-focused on dumping non-profitable assets, while improving its position in the marketplace and augmenting earnings. So far, Shell has proven capable of zigzagging through the minefield of sluggish oil prices, while maintaining stellar dividends. The trend does not give the appearance of collapsing any time soon.
Dividend investors should consider Royal Dutch Shell, looking for increasing cash flow over the next five years, along with revenue growth as demand for natural gas kicks in full-bore between 2017 and 2040. Dividends should continue at 7% and increase if the price of oil rebalances.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.