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Royal Dutch Shell: The World Has Fundamentally Changed

May 08, 2020 12:44 PM ETShell plc (SHEL), RYDAF, RYDBFBP, BPAQF167 Comments
Karl Ahlstedt profile picture
Karl Ahlstedt


  • Betting on oil companies is betting on the price of oil, and this is a thesis for higher oil prices long term.
  • Management remain competent and have done the right thing by focusing on cash flow conservation during these uncertain times.
  • Shell is continuing to look beyond oil, and into the shape of the energy sector decades down the line, and this has huge potential for long-term upside.


"The world has fundamentally changed" was the opening line of CEO Ben van Beurden this morning before he went on to "rebase" (read: cut) the Royal Dutch Shell (RDS.A) dividend from $0.47 to $0.16 cents per share, a 66% reduction. This led to stock price declines of circa 7% on the announcement and falling further since, for those interested my own purchase price is £11.99 per share of (RDS.B) for my personal portfolio on the 1st of May.

Just a quick note on both share classes, as a UK based investor I bought the B shares as they are listed in London. This allowed me to avoid the 15% tax on dividends I would have paid if I had purchased the A shares, which are based in the Netherlands.

Getting back to the dividends, as an investor I care not about how much capital is retained vs. paid out back to shareholders but about the value created with each dollar. Broadly speaking, capital is only paid out to investors when the management feel we (the investors) are better equipped to put that money to work than they are. In the case of RDS, they need the dollars to thrive (or perhaps that should read survive) more than we do right now.

Source: (Royal Dutch Shell, 2020)

Overall, my feeling is this is a relatively conservative approach and done so in anticipation of worsening conditions through the next quarter, as oil prices remain heavily depressed. In my opinion it is also a sign of a clued up and competent management, that understand while making a (small) quarterly loss, dividends would be paid out via debt. This would hardly be a sensible move given the current macro-economic climate we are in, especially with regards to oil pricing at the time of writing.

This article was written by

Karl Ahlstedt profile picture
Karl holds a degree in business management and studied post graduate investment management at a top UK university. He has since worked at some of the largest Welsh investment companies as an Investment Analyst and delivered guest lectures in Finance at the University of Wales. I can be reached on LinkedIn or directly at karl@hioim.com.

Analyst’s Disclosure: I am/we are long RDS.B. 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 (167)

There is no like button for this article, so this is my "Like".

It's funny to me how most RDS analyse like this one don't even mention Shell's global convenience store network -- more retail locations than either Starbucks or McDonalds globally. I've discussed this in detail in other comments here in SA, so won't repeat my detailed comments here. Investors consider this: It takes 30 - 60 minutes to charge an EV. When consumers charge their EV in the future, Shell has an opportunity to sell food, beverages, snacks, and other items to that captive consumer.
Retired Fernando profile picture
By talking with a shell gas station dealer, I learned that RDS gets no profit from the convenience store.There is an agreement between a major department or grocery store (eg Carrefour) and the profit is for the distributor and the dealer. That was some time ago, I am not sure if it has changed.
BTW, I think you are very optimistic with your estimation (It takes 30 - 60 minutes to charge an EV). That is if you are the first on line. If there are a couple of cars in front of you, it could be a couple of hours waiting. Dealers may enter into an additional agreement with some restaurant chain to serve lunches.
Fernando Soriano
The profit dealing is from country to country different. It depends also who the owner is of the gas station. One thing you can be sure every petrol company including Shell earns good money with the convenience store. To give you an idea, in several european countries including Germany the convenience assortment, food and non food, no oil/ gas assortment does bring more profit as the gasoline and diesel assortment.
CapVandal profile picture
They don't seem to have a network of US C-Stores.
M.Moore against Green energy
Karl Ahlstedt profile picture
Looks interesting, I will give it a watch, thanks for posting @deva33
Tuco's Child profile picture
The CEO is a Greenwash Political Animal.

Everything we touch and use in the modern world is based on fossil fuel oxidation (burning to release energy that we use), from the moment you open your eyes in the general hospital to bye bye time.

Clean nuclear to produce electricity for direct consumption and to electrolyze water and produce hydrogen would be good, but people are freaked out about nuclear which is actually quite safe now. Just don't build back-up generators below grade where they can be drowned by a tidal wave (Fukashima).
@Tuco's Child

Shell will make a boat load of money on Oil and Gas when things come back. People are acting like they are ditching Oil and Gas just because they didn't want to borrow billions to pay the dividend and that's just nonsense. They did everything they could to not cut it over the last decade, including issuing scrip shares. Easy double to 60/share in 6-18 months.
great comment pls check here about the NPP new types

The existing solar filling station remained unused because the sun simply does not shine at night, so the manager responsible said succinctly.

upper right side pull down menue , languages Hebrew etc.
Retired Fernando profile picture
@deva33, thank you for the link. Excellent article. I concur every one should read it. Any way it can be submitted to vB?
Shell can invest in utilities to fund development in tropical realms where it has assets. In Trinidad gas provides electricity to a state company, one of 50 assets which the state can divest to raise revenue for food production, homes, education, health and other needs. Gas is wasted on uinethical tobacco which can be divested to invest in bamboo to conserve water, sequester carbon and supply materials. Sugarcane ethanol can be boosted for fuel, sanitisers and preservatrive instead of rum, the cause of accidents and crime. Hold Shell forever.
learnmoney profile picture
Shell is a gas company which was not highlighted and to make hydrogen you need gas......just an example as well as no mention as to what happens when the world has no gas and oil...........what then??????
As long as the price structure in the oil and gas market is a political decision this market remains extremely volatile.
Retired Fernando profile picture
I would agree with you, but in electricity, charcoal, renewables,.. any kind of power, prices are political decisions (from high taxes to juicy subventions) not real market rules. I would prefer to turn the word volatile into unpredictable.
Fernando Soriano. Yes, I think you are right, in fact they are unpredictable.
Tuco's Child profile picture
Hydrogen, solar, and all renewables are based on and rooted in fossil fuel consumption and oxidation.

Shell and the CEO conveniently do not discuss this. A constant greenwash.
The problem with alternatives is they don't scale.


BEP ~$50 in purely renewable assests, they are extremely profitable and growing.

You were saying?
@martyr1777 I did not say green companies are not profitable. I said they don't scale, meaning you cant run big cities on renewables. I live on the East Coast of US, 18 million people. You can't do it with renewables. Hydro does a lot, the rest is fantasy. It does not work.
1Horse profile picture
wind and solar currently accounts for about 1% of the world's energy mix. And is not really scalable without causing vast environmental damage.
So - we need to stop calling these things "green".
I like how the author posted a bunch of pretty pictures talking about decarbonization as if it's magical and inevitable without any significant damage to the environment. The way it might be is inevitable is through a real technological breakthrough or by government diktat which is the scary one and the one RDS is pandering too.
Retired Fernando profile picture
Mr. van Beruden A competent leader for Shell? He does not believe in the future of Shell as an oil major. He want to transform Shell into a green utility. A Green utility!, just wait until government subsidies end. He should be kicked out from Shell at once. He would be much better as the head of a green NGO (or enter politics in the EU, which is about the same).
Veritas1010 profile picture
Buying now, first bite, sure a company transitioning to greener energy, fine.

However a faithful buy, hold accumulator (a.k.a., myself) a debacle.

I sold because my money needs to work harder, i am shifting more money (eventually) to renewables: Neste (NTOIY), Ørsted (DNNGY), ENEL (ENLAY), others that I was invested formerly I may return to p:NPIFF, AQN, VWDRY. My point is Shell is still encumbered by its hydrocarbon investments. Even NG/LNG is viewed as a pariah by green purists.

I also sold as it looks like other oil and gas majors can find as a less draconian way to deal with challenges of this nature besides slashing the investor up one way and down another: examples to date: XOM, BP, Repsol (REPYY), GALP (GLPEY).

can anyone even name companies that are making meaningful profits from solar, wind, renewables, utilities? best in class in the wrong thing is not best in class. add the debt burden and you have a company that has lost its focus and is trying to placate "greenies". the dividend cut was the last straw for the previous faithful. green tech is the energy of the future, and it always will be.
I'm confused. You correctly point out that renewables are a financial bust but then say green tech the way of the future. Which is it?
1Horse profile picture
That was sarcasm I believe! Meaning that its always in the future - ie. never in the present.
BEP, TERP.. look them up.
GabsterX profile picture
Discount rate in the DCF of 1%? I'd ask for at least 7 to 8% RR given the sector risk.
Author: please explain how you calculate that the return to shareholders has been good...it has centainly been much less than the dividend for long term holders.

Also disagree with you that shareholders should not be disappointed with the dividend cut....in view of the fact that they were told by management just a few months ago that the dividends would be raised and a few weeks ago that it was sustainable. Yes, they were unprepared for events...but, at the very least, they should have temporarily reduced or even suspended the dividend until conditions improved...but the reset was uncalled for and an inappropriate disservice to shareholders for whom they work. All in my view...
Karl Ahlstedt profile picture
Hi @retired358, I'd recommend you read www.ft.com/... to see how well Shell has performed historically.

As to dividends, you can still get them via selling a few shares. Its a case of retained value vs paid out value, and those who want more value paid out are welcome to dilute their position to offset any cut, though I dare say now would not be an ideal time to do so.
Karl. Could not open your url, but as a shareholder since 1970, I can certainly calculate my return. As an overview, one only needs to know that in 1997, the last time there was a share split, the stock reached 67. It is now near 30 as you well know. The dividend has averaged (basis a share price of about 60), approx 4% over the 20 plus years. So, total return to shareholders, basis a loss of about 50% in share value, has been very poor (certainly well less than the dividend and much to close to zero on a PV basis). Do you think otherwise. If so, please explain.
In the article "However, long-term prices will undoubtedly rise well above $35 and hit $60 globally at some point within the next ten years" Hahaha really? This is as reckless and pointless prediction as I've seen here.
I don't think it will take 10 years before oil reaches $60 a barrel again. $60 a barrel is pretty much a reasonably balanced price where it is not overbearing for the consumer and the oil companies can profit and invest.
Brent is over 30 already.
Karl Ahlstedt profile picture
Hi @topluso, happy to eat my hat on this if it proves to be wrong. Appreciate your engagement!
What percentage of RDS is windmills, etc? I think it's tiny, so not sure why everyone is acting like they are a Windmill company now or even headed that way anytime soon.
People are determined to force this issue in order to destroy western power by shackling us all to a windmill and a solar panel.
Tuco's Child profile picture
Good point.

The environmental destruction and carbon oxidation to create wind power is unsustainable.

If you care about birds, they are a real disaster as well.
1Horse profile picture
Agree that in the long term oil will be much higher - probably triple digits after 2022. But is RDS the way to play it? Dividends are gone. They are more about lng ( highly dependent on China growth) , and have gone in with both feet into the "green" stuff - windfarms and such - with questionable economics - mainly work as long as the political winds are favorable, and these things are subsidized by the central banks .
The Canadian oil companies seem much better to me . Or even mid-sized producers in the US - like a Murphy .

Shell needs to explain why anyone should invest in them.
Nicklaas profile picture
A very comprehensive and well-argued piece, Mr Ahlstedt.Thanks for sharing your thoughts.

Always good to look at dis-confirmatory evidence given that I just sold my (small) RDS position.

Basically I had never been really happy with their returns on equity or capital for many yrs. Granted this is tricky in a cyclical industry with lots of price volatilty hitting after you have committed capital.
But still: their ROE is ±6%, CNQ = 9.5% (data from FT.com) and even utility National Grid manages 7.5.%. OK, maybe their utility strategy will be an improvement.
Funny: British Gas was split in an upstream co that was taken over by RDS a few yrs ago and what is now Centrica (the distribution networks, retail side -- widely seen as a basket case afte yrs of malfunction). Now RDS moves into the utility space... Why should it work out now?

RDS is in an extra tight spot here as they are heavily invested in LNG trains -- $ 12 - 20 B capex a piece. You think you sold your stuff / fixed your pricing for yrs. Then a lot changes against you.
Bad luck? Yes. But also a risky bet right from the start. No black Swan.

I did not do the math in detail , but w hindsight and given current prices the $ 50 B or so gas takeover a few yrs ago must look awfully capital destructive. Asked in the 1Q analyst meeting, the CEO waffled on this....

They just more or less exited shale - another costly 'unlucky' bet.

You yourself note their ill timed / expensive buy-backs. Bad luck? If you want to do that why not slash the dividend first, then buy back at a discount?

Reserves < 8 yrs. Far below peers and sinking. Abysmal reserve replacement ratio for yrs. Good if you believe those hydrocarbons are stranded assets anyway. But can anyone claim that with a straight face for a time horizon of 8 yrs?
If not they have underinvested in the upstream for yrs.

So in sum: Are they really a good steward of capital, have they earned trust, as the CEO claimed (again in the 1Q analyst meeting)?

Well, I am happy I am out for now. If I want renewable energy I can get that via BRKB at a ROE > 20% and as part of a much de-risked portfolio.

If I want oil / gas BP is a lot simpler and has (I think) better growth prospects and better transformed the company (they also do some post - carbon fig leafs...) and if want someone who really seems to sweat their assets it would be CNQ.

I will reconsider RDS at around 600p (should they get there, they were in the 800s in March)
I do like their refineries, chemicals, downstream footprint and also their trading.



I always find it funny how people are so negative on a company AFTER they sold their shares. Let's talk about XOM......they are a HORRIBLY run company. Shell's a great company. Good luck to you.
Exxon is the daddy shell fell short again
Karl Ahlstedt profile picture
@Nicklaas and I appreciate your own extensive comment here, interesting reading, thanks for posting.
I'm convinced that the straw that broke the camel's back was the Saudi Arabia Wealth Fund that bought a ton of Shell shares in March. Shell HAD to be irate that Saudi was going to buy there stock at a 15-19% dividend Yield and hold it forever.
Nicklaas profile picture
An interesting angle. N
Karl Ahlstedt profile picture
Heh, this made me chuckle, who knows! @Dead Broke
smurf profile picture
Panic sellers. Then they'll jump back in when these oil stocks are 20 points higher. I think that's sell low, buy higher?

What is your take on Shell's renewable push? Are they moving too soon or is the move they are making right now not as massive and overblown among the naysayers? My only concern with Shell is lower revenue and margins going forward.
They are way behind the curve on renewables. There are renewable pure plays with billions in functioning power assets that are profitable and successful.

Take a look at BEP, Shell will not be able to catch up to them.

I'm not wanting them to catch them. I'm wanting them to ride the Oil train for as long as it's profitable.
Well written, well thought out. Thanks.
Karl Ahlstedt profile picture
Thank you for the kind words @dmau3.
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