Oil major Royal Dutch Shell has decided to cancel its scrip dividend program, starting from the fourth quarter of this year.
The cancellation means that the fourth quarter 2017 interim dividend and future dividends will be settled entirely in cash, rather than the company offering a share-based alternative. According to Bloomberg, this is the first time since 2015 for Shell to stop paying dividends in shares.
As a result of the program cancellation, no scrip dividend will be offered for Shell’s fourth quarter 2017 interim dividend, to be announced on February 1, 2018. The third quarter 2017 interim dividend, payable on December 20, 2017, is not affected and provides eligible shareholders with a choice to receive that dividend in cash or in shares via the program.
The $30 billion divestment program between 2016 and 2018 is almost delivered, with deals worth $23 billion completed (headline), $2 billion announced, and $5 billion in advanced progress
In addition to the announcement about the scrip dividend cancellation, Shell Chief Executive Officer, Ben van Beurden, on Tuesday updated investors on the company’s strategy.
Van Beurden highlighted three updates from his presentation: “We have increased our outlook for organic free cash flow, which has been consistently strong over the past five quarters. We have also made significant progress with our divestment program, allowing us to reduce net debt in that time. Meanwhile, we intend to cancel our scrip dividend program with effect from the fourth quarter 2017.”
The company also announced a net carbon footprint ambition covering not just emissions from its own operations but also those produced when using Shell products.
“We will do this in step with society’s drive to align with the Paris goals, and we will do it by reducing the net carbon footprint of the full range of Shell emissions, from our operations and from the consumption of our products,” said van Beurden.
When it comes to the company’s financial outlook, the outlook for annual organic free cash flow has increased from $25 to $30 billion by 2020 at a Brent crude oil price of $60 per barrel (real terms 2016). This is $5 billion more than the outlook Shell provided during its capital markets day in June 2016.
Shell said that debt reduction remains a priority. Gearing stood at 25.4% at the end of 3Q 2017 and additional divestment proceeds of more than $5 billion since then mean that 20% gearing is in sight.
The delivery of new projects continues, and the company remains on track to deliver 1 million barrels of oil equivalent per day, and $10 billion of cash flow from operations from new projects by 2018 (at $60 per barrel, real terms 2016). Shell expects to deliver an incremental $5 billion cash flow from operations by 2020.
“Tackling climate change is a cross-generational, global and multi-faceted effort”
The $30 billion divestment program between 2016 and 2018 is almost delivered, with deals worth $23 billion completed (headline), $2 billion announced, and $5 billion in advanced progress.
Once this program is completed the company expects to continue divestments at an average rate of more than $5 billion until at least 2020.
The company’s annual capital investment will continue to be between $25 and $30 billion, and at current oil prices capital investment will be managed towards the bottom end of that range, or lower if needed.
Annual underlying operational expenditure will remain below $38 billion until 2020, with efficiency gains expected to deliver further reductions, building on the more than 20% reduction in operational expenditure since 2014.
The company expects to continue to grow organic free cash flow throughout the 2020s at a more moderate rate. Increased distributions to shareholders in the form of share buybacks in line with the plans confirmed below is expected to support a stronger growth in its metrics per share.
Scrip dividend program cancellation
The company is confident it can cancel its scrip dividend program while investing at sufficient levels to maintain value accretive growth in the portfolio.
The strength of its balance sheet, coupled with stronger cash flow and a relentless focus on capital efficiency, discipline and flexibility, have given the company the confidence to cancel the scrip dividend program with effect from the fourth quarter 2017 dividend.
Separately, as per intentions stated in December 2015 at the time of the combination with BG, the company is confirming the plans for share buybacks of at least $25 billion in the period 2017-2020, subject to progress with debt reduction and recovery in oil prices.
In Integrated Gas, to sustain its strength and competitive advantage in LNG through the 2020s, the company will continue to assess opportunities for selective growth – cost competitiveness will be a key decision criterion.
Upstream has implemented a successful and continuing operational excellence program, delivering more production and lower costs. Management is confident in the growth, increasing returns and sustainability of the company’s upstream portfolio into the next decade.
According to Shell, Downstream continues to deliver strong financial performance.
The development of new energies as a future growth platform will accelerate and the company will increase the capital allocated to this business to $1 to $2 billion per year until 2020.
Shell groups its seven strategic themes into three categories – cash engines, growth priorities and emerging opportunities.
Integrated Gas, conventional oil and gas, and Oil Products are currently cash engines; deep water and Chemicals are growth priorities; shales and new energies are emerging opportunities, Shell said. Illustrating the dynamic nature of the company’s portfolio, the intention is for deep water to have become a cash engine by 2020, and shales to have become a growth priority by 2020.
Reducing net carbon footprint
Shell also unveiled its ambition to cut the net carbon footprint of its energy products by around half by 2050. As an interim step, by 2035 it will aim for a reduction of 20%.
The company will measure its progress by disclosing the net carbon footprint not just from its operations and energy use, as it does now, but also from the use of its energy products, expressed in grams of CO2 per megajoule consumed and taking account of any emissions offset. This measure will be tracked over time, with reviews every five years to ensure Shell is progressing in line with societal progress towards the carbon footprint reduction required to meet the Paris goals.
“Tackling climate change is a cross-generational, global and multi-faceted effort,” van Beurden said. “This is a challenge for the whole planet, for all of society, for customers, for governments and indeed for businesses. It will mean meeting increasing energy demand with an ever-lower carbon footprint.”