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What Shell's Dividend Cut Means For Exxon Mobil, BP, & Co.

May 07, 2020 12:29 PM ETShell plc (SHEL) StockBP, BPAQF, COP, CVX, RYDAF, RYDBF, SHLLQ, TTE, TTFNF, XOM182 Comments


  • Shell announced solid Q1 results that were better than expected.
  • Shell nevertheless cut its dividend in order to prepare for a Q2 that will be weaker.
  • Shell looks like a solid long-term investment.
  • Several other oil majors look like they may be forced to cut their dividends as well.
  • This idea was discussed in more depth with members of my private investing community, Cash Flow Kingdom. Get started today »

Article Thesis

Royal Dutch Shell (RDS.A) (RDS.B) cut its dividend by two-thirds a couple of days ago, which shocked many investors. The surprising move, the first dividend reduction in more than 70 years for the supermajor, does not mean that Shell is a bad investment, though. The dividend reduction will allow the company to preserve liquidity in order to weather the current crisis more easily.

Shell's dividend cut also brings up the question of who might be next to cut the payout, with several other major oil companies being in a position where they might be forced to cut their dividends as well.

Income, dividends, investment income, dividend cut Source: Seeking Alpha's image bank

Shell's First Quarter Results Were Not Too Bad, But Things Will Be Worse During Q2

Shell announced its first-quarter results a week ago, reporting revenues of $60 billion, which was down 28% year over year. Despite the massive revenue drop, Shell still managed to generate profits of $2.8 billion during the quarter, despite oil prices slumping during the quarter.

Shell also managed to generate massive free cash flows of $12.1 billion, although that was impacted by one-time items such as a decline in Shell's working capital. Adjusted for that, Shell still managed to generate free cash flows of $4.7 billion, or close to $20 billion annualized.

For a company that is heavily impacted by a double black swan event of lower oil consumption (due to COVID) and lower oil prices (Russia-Saudi oil price war), generating free cash flows of that magnitude is not a bad result at all.

This brings up the question of why Shell has cut its dividend, as the dividend was still covered during the first quarter thanks to the company's strong cash generation. The explanation is that the second quarter will, in all likelihood, be worse than Q1. Global oil demand dropped

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This article was written by

Jonathan Weber profile picture

Jonathan Weber holds an engineering degree and has been active in the stock market and as a freelance analyst for many years. He has been sharing his research on Seeking Alpha since 2014. Jonathan’s primary focus is on value and income stocks but he covers growth occasionally.

He is a contributing author for the investing group Cash Flow Club where along with Darren McCammon, they focus on company cash flows and their access to capital. Core features include: access to the leader’s personal income portfolio targeting 6%+ yield, community chat, the “Best Opportunities” List, coverage of energy midstream, commercial mREITs, BDCs, and shipping sectors,, and transparency on performance. Learn More.

Analyst’s Disclosure: I am/we are long RDS.A. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (182)

Nick Cox profile picture
The only reason to own oil companies is a short-term one, because they have historically paid out strong dividends.If that goes away, then the last reason to hold oil companies evaporates.
The companies are all hamstrung by huge investments in stranded assets, a problem that will only get worse as renewables replace fossil fuels.Soveriegn wealth funds are quite rapidly pulling their invetsments out as they focus on more ethical investments,
Jonathan Weber profile picture
@Nick Cox

When do you think fossil fuels are replaced? Most experts see fossil fuels growing for 20 more years
Nick Cox profile picture
@Jonathan Weber
As I have pointed out elsewhere,the IEA calculates that worldwide renewable energy capacity will grow 50% between 2019 and 2024.That would represent a capacity equivalent to the total capacity of the USA today.That is business effectively transferring from fossil fuels to renewables, so lost business for the oil companies (speaking very broadly).
Of course fossil fuel usage will remain for decades, maybe for ever, but its usage will decline quite steeply and a lot of investors are pulling out of fossil fuel stocks on ethical grounds.
Diderick profile picture
Stranded assets ? The existing producing fields and plants will be "naturally" depleted along the years of production well before hydrocarbons' time has passed. On the contrary, should the advent of so-called renewable energies (a hodge-podge with plenty to take and even more to forget) take place earlier than 2040 or so, the adjustment would likely intervene through lower exploration and production investments, releasing more FCF in the process (of which hopefully not all will be dumped in new fields of activity so that shareholders might derive some benefit of that situation).
This whole thing about Shell moving light speed to renewables is WAY overblown. They aren't. When Oil goes back up they will make a killing on Oil and Gas. LNG as well.
Jonathan Weber profile picture
@Dead Broke

Yes, they are doing great PR in this regard as many believes they try to become a renewable company, but they invest much more in oil and gas
CapVandal profile picture
They aren't really even considering reinstating the dividend, They talked about "growing" it. That's why long term income investors would prefer a 30% or 40% cut. They would at least have a plausible hope to recover back to the pre cut level.

If it were really about covid19, they could have taken a dividend mulligan or dividend holliday until it is over. With a promise to reinstate. But this is their solution to years of bad capital allocation mistakes. And their disgust with oil wrt global warming.

Your future earnings will instead be spent on green energy speculation. You can lose your money more efficiently by skipping the middleman and investing in green energy directly. Best of luck.
Jonathan Weber profile picture

They still invest majority of cash in oil and gas, not renewables
Uain53 profile picture
Speculate on "Green Energy" which simply moves the pollution and CO2 off shore? The same "Green Energy" that has jumped the shark and has a learning disabled teenager that can only sputter "how dare you?" as the spokes model?
The same "Green Energy" that increase taxes and power bills on the lower income echelons so that the cynical wealthy can buy their subsidized virtue signal toys ?
Please tell me I missed your sarcasm.
Jonathan Weber
Correct they have to invest 2 times, one time for the existing business and the second time for the hopeful new business. For these reasons the future dividends of Shell cannot be any more so high as in the past.
If Shell is going to use the coming years the "saved dividends" and the "saved not necessary costs" for real worth wile future investment including new type of energies than Shell could be a good investment. If not I prefer a very high dividend.
Jonathan Weber profile picture
@Peter Peeters - old

They do some investments in renewables, but their focus remains on oil & gas.
64transformation profile picture
haahha author has been an XOM pumper for years...now a dividend cutter
Jonathan Weber profile picture

I am saying it is possible that XOM will cut its dividend during this unprecedented and unforeseen crisis, do you not agree?
The reason they are in the position to need a dividend cut is because of their ill-advised BG acquisition back in 2014. XOM has the XTO albatross in its recent history but it has worked out most of the damage from that deal and expect the remaining parts of XTO to be big contributors over the next few years.

Chevron was fortunate to avoid the disaster shareholder value destroying deal for APC thanks to the unqualified token hire CEO at OXY.

BP, just an absolute crap company but their size and behind the scenes government backup will keep their dividend fairly safe.

In sum, yes RDS will be best positioned to handle this storm but they will also be the only one to cut their dividend. Since no one buys these companies for growth they just cut their dividend to spite their face. The CEO and CFO should be sacked post haste.

Yet if Oil raises to 55 next year, Shell will be a 55/share stock next year.
Jonathan Weber profile picture

Agree that CVX avoiding APC was great for shareholders. The BG deal is not a bad one, though, it has helped RDS generate very attractive cash flows in recent years.
Jonathan Weber profile picture
@Dead Broke

Yes, Shell has huge upside once oil prices normalize, likely more than CVX for example.
This was an excellent article and provided perspective that has been missing in other articles I have read. Despite indications the industry is in decline, generally speaking when a barrel of oil drops below the price of a case of Coors Light it's a good time to go long.
@benkw On oil or on Coors?
Jonathan Weber profile picture

Thanks a lot! Glad you enjoyed it.
andrew19067 profile picture
....is thinking prudently...
andrew19067 profile picture
A thoughtful and balanced article, thank you. Its a different world now, and RDS management is a thing prudently. I'd rather see them raise the div in a year or so when things recover and they're still profitable, then pretend things are fine like XOM is doing. And yes, I bought after they cut the div.
Jonathan Weber profile picture

Thanks, glad you enjoyed it. Agree that they can always raise the dividend again once things are back to normal.
I'm just curious Andrew - how long have you been in the stock? If you talk some long-term holders, people who worked for the company, you may get a different perspective . I used to wonder why these people were so downbeat about the company and they would say things like, "it hasn't gone anywhere in 15 years."
There were a number of the old timers like that over on the yahoo board. And they used to insist that the only way to make money was to trade the stock.
andrew19067 profile picture
About 2 years. I also own ET, so I'm partial to oil and gas.
David-McCormick profile picture
Thanks for a timely article. One is probably corrrect to be concerned about DEBT. Totals of balance sheet debt may not reflect the capitalization as clearly as PERCENTAGE of ASSETS that are DEBT. Thus if two firms have $40 billion in debt each, and one has $100 billion in total assets and the other has $300 billion in assets, the larger firm might be better able to handle the debt. Some of these majors are much larger in capitalization (with more equity) than others. Thanks again for a timely article.
Thanks for bringing up debt. It used to be possible to get at least a vague idea of a company's relative debt on Morningstar. With the new layout, it is no longer possible. Folks please weigh in on how you estimate a company's debt, I'm not the only one whose struggling.
Jonathan Weber profile picture

Glad you liked it!

Agree that debt should be looked at relative to assets, EBITDA etc
Jonathan Weber profile picture
@MassSpec Guy

It can be seen in detail in company reports, but also on Seeking Alpha itself, or on screeners such as finviz (debt to equity).
I might have understood and accepted a reasonable cut, but what they did was much too severe. I sold my position right after the announcement. There are better investment opportunities elsewhere. In many cases like this the stock price eventually drops until the dividend yield becomes attractive again. I'll watch, but I have no interest in Shell at current price levels. As others have pointed out, this is not a growth industry. It is an industry in decline. The only reason for hanging around is for reliable dividends. -w.
Jonathan Weber profile picture

I think making a steeper cut is prudent when one does a cut. Cutting by 20% would not have saved a lot of cash and yet the dividend track record would still be damaged.
mvdigiro profile picture
Hello wrayce,

I'm in total agreement with you. The only reason I hold RDS-B is for the dividend to fund my retirement. I expected little to no grown in the stock price but was OK with that because of the belief that the large dividend was safe. With the large reduction, I no longer have faith in the management and plan to sell the stock after the upcoming dividend. As you state, there are better companies paying a higher yield with likely growth in both the underlying share values as well as the dividend. The same can not be said of Shell.
@Jonathan Weber @mvdigiro The thing is, up to a 40% cut along with an explanation would have likely been acceptable to investors like mvdigiro and myself. I think we would have seen the company as responsible and stayed on board, at least I would. They mauled us without even saying "sorry." This cost them credibility. I might consider reentering RDS below 20 as a very speculative alternative energy play. They are no longer a dividend stock and, in my opinion, have no place in a dividend portfolio. -w
CorvetteKid profile picture
TOT keeping her dividend is another black mark for the clowns at Royal Dutch Shell.

They screwed up with the BG deal and they probably overreacted. They cut the dividend right at the peak of the supply glut and demand bottom.
Jonathan Weber profile picture

The BG deal helped them weather the 2016 crash well and generate massive cash flows over the last couple of years.
@Jonathan Weber

The CEO was asked win the Conference Call if he regretted the BG purchase and he reminded the analysts that the BG purchase was a bright spot in this quarter's earnings.
smurf profile picture

You're wrong about the BG deal. That was a good one.

You write articles?
Shell had to stop buying stocks and paying dividends. That is a fact. If the price of oil recovers a bit, they may start generating enough cash to buy distressed energy businesses.
Jonathan Weber profile picture

I think they could have financed dividends via debt, such as XOM is doing or BP. But they chose to be conservative, which is not a bad thing. Agree that some buying opportunities may be coming up for them and others.
CorvetteKid profile picture
The probably could have held the dividends but they haven't streamlined OPEX enough and their bet on LNG has gone disastrously wrong.

They thought LNG would average $12. It's closer to $5.
XOM already announced no dividend cut...
@Appland HD

Just for this quarter. In their conference call, the CEO admitted that it's possible if things get worse.
John Rhodes profile picture
@Dead Broke

Exact language used? Quote? Word for word? Open to interpretation...
Honeycomb888 profile picture
Reminder: When there were rumors COP would cut its dividend a couple of years ago, COP raised its dividend a tiny bit (1 cent?), and said it would not be cutting its dividend. Then it announced a dividend cut before the next payout after the 1 cent hike. The CEO had to know that it would cut its dividend. Cynical me suspects they hiked it a tiny bit to lure more investors and keep existing ones, before lowering the boom 2 mos. later. COP was a dividend aristocrat, as I recall. The company execs say what they have to, for the benefit of the company and its stock.
Exxon pays out a high dividend because the stock price is low
Mili21 profile picture
Not from the stock price perspective but from payout ratio (130%) perspective....seekingalpha.com/...
Jonathan Weber profile picture

Stock price is low for all majors, which is why yields for the whole group are high.
Which is the signal to buy. I loaded up on XOM at $32, I mean went all in. Could not be happier about that possible once in a decade opportunity that only lasted for a few hours.
As a long term investor (not a trader), I expect the return on my investment either via long term capital gain or a dividend payout. In case of oil companies - since not being in a growth industry - the long term capital gain should be excluded. Hence, the dividend payout is the only mechanism to achieve a return on one’s investment. With meager and uncertain dividend and a panic-prone management, there is no compelling reason to invest in Shell Oil. Take your losses and stay away from this documented looser.
Jonathan Weber profile picture
@toto shyardi

Cutting the dividend allows for more reinvestment, which should help capital appreciation
@Jonathan Weber

Some dividend investors look the other way. Take XOM for example. Since 2014, it's down from 100 to 44. That's 56 bucks lower. Over that same time period they've paid investors about $ 25/share in dividends. So XOM longterm dividend investors are DOWN about $31/share since 2014. That's a horrific investment, a badly losing investment. So what good were the dividends? All they did is slightly muffle horrible losses. Shell looks GREAT going forward.
Jonathan Weber profile picture
@Dead Broke

I agree that it makes sense to look at total returns, dividends in a vacuum is not the best way to look at it. True that RDS could generate nice returns over the coming years.
Greenhorn Investor profile picture
Thank you for the article.
James Myung profile picture
XOM has been borrowing to manage its dividend payments. RDS yeah it also borrows but its FCF have been enough to cover dividends in the previous Qs including Q1 2020. If XOM doesn't change its dividend policy, it will gradually increase debt.
Jonathan Weber profile picture
@James Myung

True, they had better FCF than most.
MoneyPig profile picture
Integrated oil companies seek profit over the entire value chain from production to refining and marketing. Different companies market in different regions and gave different degrees of integration.
Jonathan Weber profile picture

That is true, but the current crisis will nevertheless make them report losses for a while
MoneyPig profile picture
RDS has very good operating margins, 16%. Right now, both production (low oil realizations) and refining (low volumes) are impacted.

So, management's actions suggest RDS

(a) may not own many physical gas stations (where profit is today),

(b) has more oil production than gas production (product mix), and/or

(c) oil production volumes greatly exceed refining volumes (not well integrated).

I don't own RDS, but I would check (a), (b) and (c) above.

I know for BP, they (a) own a lot of gas stations, (b) have a nearly 50/50 mix liquids and gases, and (c) production is 30% larger than refining.

These guys don't cut. So, I would wonder why? The last reason, a financial reason, debt may be due this year and next.

Hope this helps.
Jonathan Weber profile picture

Refinancing debt shouldn't be a problem for RDS, but management wants to be conservative. They have a large downstream footprint, but that is likely not very profitable during Q2, due to lower gasoline sales
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