On the 30th of April Shell announced it would reduce its dividends for the first time in 75 years. The dividend will be reduced from € 0.48 to € 0.16. Shell follows the Norse oil giant Equinor which also reduced its dividend by 66%. The last time Shell lowered its dividends was the second world war. This again illustrates the unprecedented impact of the covid-19 pandemic on the worldwide economy. An economy which is still largely dependent on fossil fuels and where a shutdown transport under a lockdown hits companies such as Shell therefore disproportionally hard.
Before the spread of covid-19, the oil market did not look so rosy either. The collapse of production agreements between the OPEC+ cartel already depress oil prices the first quarter. Add the estimated demand collapse of 30 million barrels per day to the equation, and you have oil prices at rock-bottom. In fact the West Texan Intermediate (WTI) even reached negative territory on Monday 20th of April. While Shell itself sells no WTI, oil prices plummeted worldwide. OPEC+ has announced to reduce production with ten million barrels per day, roughly 10% of production. However, this will not be enough to compensate for the unprecedented fall in oil demand.
As a company, Shell is undergoing a change. For years it has been increasing its share of gas production and little by little in sustainable energy compared to oil, although this shift is going slowly. However, the price of gas is often in line with the price of oil. Shell as a possible ‘integrated supermajor’ has an upstream (operation) and a downstream division (refineries). This first division logically sees margins falling because of the lower oil price. The downstream division sees increasing margins because of that, however, the huge demand decrease depresses the margins there as well. Shell is therefore affected in all its divisions by the current crisis.
Although quite a bit of misery was already included in the share price, markets were surprised and reacted negative on the announcement of the dividend cut. The stock has been decreased with around 10% since the quarterly figures and today announcement. However, cash is kept in house, which can give Shell a long-term advantage over its competitors. Whether this shock is sufficiently visible in the price is never that clear.
By: Joris Hoefnagel