Shell has cut its dividend payments to shareholders — the first time the Anglo-Dutch supermajor has done so in almost 80 years — as first-quarter earnings fell 46% year-on-year to $2.86 billion on collapsing demand due to the coronavirus pandemic.

Shell said cuts to operating and capital spending, as well as cancelling all staff performance bonuses, were also among measures it is taking to strengthen the balance sheet.

It also warned production would be significantly lower in the second quarter.

Shell is reducing its first-quarter dividend to 16 US cents, down 66% on the 47 cents per share paid out in the final quarter of 2019.

Rather than being a temporary measure, this will be a long-term “reset and rebasing” of the dividend policy, officials said.

Chief executive Ben van Beurden said the action was necessary because of the "unprecedented" scale of the spread of Covid-19 and the deterioration in the macroeconomic and commodity price outlook.

'Prudent steps'

The sector is facing a "crisis of uncertainty", van Beurden said. which was unlike the relatively predictable pattern of previous downturns.

“Given the continued deterioration in the macroeconomic outlook and the significant mid and long-term uncertainty, we are taking further prudent steps to bolster our resilience, underpin the strength of our balance sheet and support the long-term value creation of Shell," van Beurden said.

“This is something that is difficult and hard to do, but also very necessary.

“And the difficult circumstances that we are in today, that is all focused on, of course, being financially resilient and being a strong company ready and positioned for the recovery.”

Weaker results

Earnings on a current cost of supplies basis, a measure tracked closely by analysts, were $2.9 billion in the first three months of the year, down 46% from $5.3 billion in the same period in 2019 and at a similar level to the final quarter.

Group-wide first-quarter production, also including the integrated gas division, was 3.72 million barrels of oil equivalent per day, down 1% on the same three months in 2019 and at similar levels to the final three months of last year.

The company’s upstream division plummeted to a loss of $863 million in the three months to 31 March compared to $1.62 billion in the same period last year.

This included charges of $776 million related to the impact of the weakening Brazilian real on a deferred tax position and $416 million related to impairments, mainly in Brazil and the US.

Compared with the first quarter 2019, production in the upstream division was 5% lower, mainly due to asset sales, natural field declines and lower production in the NAM joint venture in the Netherlands with ExxonMobil.

It was partly offset by field ramp-ups in the Santos basin, Gulf of Mexico and Permian basin.

Uncertainty 'bugs' Van Beurden

Van Beurden added: “What is bugging me most is the uncertainty at this point in time."

He insisted the action to preserve cash will mean the company remains a good investment proposition.

"It may sound a bit difficult on a day like this, but we absolutely have the ambition to be a world-class investment case," he said.

The company expects to cut operating expenses by $3 billion to $4 billion over the next 12 months compared with 2019 levels and to slash capital expenditure to $20 billion or below from in 2020 from a planned level of about $25 billion.

For the second quarter, Shell expects upstream production to be in a range of 1.75 million to 2.25 million boepd and the integrated gas division is expected to produce 840,000 to 890,000 boepd.

Chief financial officer Jessica Uhl conceded that the planned production cuts were “rather significant”.

But she said “on the whole, the production numbers reflect... the dynamics of the current circumstances rather than anything fundamental from an operational perspective”.

“Because of that, on balance, we don't expect any of this to be permanent,” she said.

Dividend cut in spotlight

Van Beurden said about the dividend cut: “If we had not cut the dividend, if we had to get all the counter-measures out of operating cost savings and capital cost savings and even sacrificing our financial resilience further and further, we would have been left without options to reposition the company for the recovery and for the future.”

Analysts at Berenberg said: "We are surprised that the company has cut the dividend at this stage and expect the market to take the news negatively. While it gives management breathing room and may allow a reset for a more sustainable dividend policy over time, we believe that yield was the main attraction for investors in the stock. The dividend cut could, therefore, limit the recovery potential for the share price."

Analysts at Wood Mackenzie said the annual dividend pay-out will fall from $14.9 billion to $5.1 billion, freeing up $10 billion of capital.

Tom Ellacott, senior vice president with WoodMac’s corporate analysis team, said: “The move is a sensible and prudent action to preserve cash in the face of huge macro uncertainty.

“A permanent dividend reset could also accelerate the strategic pivot to 'Big Energy' through the reinvestment of more retained earnings in the youthful zero-carbon energy sector.

“Shell’s dividend cut has thrown down the gauntlet to the supermajors. BP, Chevron, ExxonMobil and Total are due to pay out $41 billion of dividends in 2020. Combined pay-outs would fall by $27 billion if they all cut by 66%.”

The last time one of the supermajors cut the dividend was BP, in the immediate aftermath of the Macondo disaster in 2010.

Finance

Shell cuts dividend for first time since World War 2