Royal Dutch Shell cut its dividend for the first time since 1945, cutting its payout by two-thirds.

While U.S. shale drillers face the prospect of near-term bankruptcy, the oil majors are also getting hit on all fronts. Upstream profits are down because of the collapse of oil prices. Downstream units are getting killed because of the evaporation of gasoline and jet fuel demand. The LNG trade was also cyclically down heading into the pandemic; now it is deteriorating to even lower levels. All the while Big Oil was dishing out dividends at an unsustainable rate – they were borrowing to cover dividends even before the pandemic.

That makes Shell’s decision understandable and somewhat inevitable – and something that even the company admitted. “It is of course a difficult day, but on the other hand, it is also an inevitable moment,” Shell CEO Ben van Beurden said on Bloomberg TV. “We basically have a crisis of uncertainty. Uncertainty about demand, about prices.”

“Maybe even uncertainty about the viability of some of our assets given all of the logistical issues we have,” he said.

Shell has way more debt than its peers, and maintaining hefty dividends would only exacerbate that pressure. “The problems have been building for a while,” Alastair Syme, oil analyst at Citigroup Inc., told Bloomberg. “All roads lead back to the high price paid for BG and the burden that this acquisition put on the company’s financial structure.” Shell spent more than $50 billion five years ago to purchase BG Group, making Shell one of the largest LNG exporters in the world.

 

Shell’s total oil and gas production is also expected to fall sharply in the second quarter, down to between 1.75 million and 2.25 million barrels of oil equivalent per day (boe/d) from 2.7 million boe/d in the first quarter. A big chunk of that is because Shell will have to shoulder some cuts as part of the OPEC+ cuts; Shell operates in some member countries, such as Nigeria.

Even the massive capex cuts that Shell has already taken were not enough. As a result, the dividend needed to be reduced. The new, smaller shareholder payout, is “affordable,” van Beurden said.

“It’s also not wise or prudent or even responsible to pay out a dividend if you know for sure that you have to borrow for it, deplete your liquidity and, at the same time of course, also reduce the resilience in a world that is going to be totally unpredictable for some time to come,” he said.

Shell’s decision was not received well by Wall Street. Its stock was slammed after the announcement, down 12 percent during midday trading. Meanwhile, BP’s and ExxonMobil’s stocks were only down 6 percent and 2.5 percent, respectively.

But the move will increase scrutiny on some of the other oil majors. Most of them also have dividends that they cannot afford, at least over the long run. ExxonMobil maintained its dividend but froze it, ending years of steady increases. ConocoPhillips also maintained its dividend, even as it said it would cut production even deeper, slashing output by 420,000 bpd in June.

 

 

Shell’s dividend reduction came a week after Equinor slashed its dividend. The divide between how European and American oil companies approach the dividend is stark.

Beyond the initial disappointment from investors, Shell’s decision is arguably the more prudent course of action. RBC Capital Markets argued that the dividend cut will allow Shell “to pivot more easily through the energy transition.”

Most importantly, Shell’s Ben van Beurden argued that the oil market may not return to “normal.” Lifestyles will probably “be altered for some time to come, whether that is because of the economic bandwidth that people will have or businesses will have, or whether it is because of attitudes,” he said on Bloomberg TV. “We do not expect a recovery of oil prices or demand for our products in the medium term.”

“Will demand ever go back to where it was? That is hard to say,” van Beurden said, admitting that the odds of peak demand arriving this decade “has indeed gone up.”