RDA.S Stock: Is Royal Dutch Shell plc’s 7.5% Yield Safe?

Is Royal Dutch Shell SafeWill Royal Dutch Shell Be Able to Pay Its Dividend?

To say that times have been tough for Royal Dutch Shell plc (NYSE:RDS.A) in 2015 would be an understatement, with the oil price crash crippling the company’s bottom line and causing the RDS.A stock price to nosedive.

Crude oil prices have collapsed by nearly 40% since July 2014 and Shell is one of the large oil companies hit hardest by the downturn in energy prices. Indeed, Shell posted a $6.0-billion loss in the third quarter of 2015 alone. With losses like these continuing to mount, analysts have begun questioning if Shell will be able to pay its dividend. (Source: “Royal Dutch Shell Plc (NYSE:RDS.A): Could Shell Stock Be About To Crash?” Yahoo! Finance, November 5, 2015.)

How has the company responded to the ongoing low-oil-price environment?

Shell Cutting Costs, Canceling Projects

Shell has announced it will be abandoning its drilling campaign in the Arctic region, scrapping its least economic plays in North American shale oil and gas, eliminating the Carmon Creek project in the Canadian oil sands, initiating a selloff of man of its global assets, and concentrating on liquid natural gas (LNG) efforts.

This should really come as no surprise, because when it comes to trimming budgets of huge multibillion-dollar international energy projects, Shell is certainly not alone (Source: “Oil Megaprojects Won’t Stay On The Shelf For Long,” OilPrice, November 2, 2015.)

As oil companies are desperately scrambling to stop the hemorrhaging of cash as a result of low oil prices, the most expensive projects are first on the list to be slashed. As the need to bring troubled financial balance sheets back to within reasonable levels takes hold, exploration and production is first to be cut. With an eye towards maintaining dividend payments to its shareholders, Shell must now focus on reining in its growing cash problems.

Shell is expected to allocate approximately $35.0 billion in capital expenditures for 2015, as compared to $45.00 in 2013. While capital expenditures will remain unchanged for 2016, this $35.0-billion figure is the total of both Shell and BG Group, the latter of which is due to merge with Shell. (Source: “Shell Steams Ahead With BG Takeover With Promise of More Savings,” Bloomberg, November 3, 2015.) This represents a significant drawing down in terms of expenses. The cuts are even more pronounced when it comes to shale plays, where Shell has reduced investments from $4.0 billion to $2.0 billion between 2014 and 2015.

Hard times, indeed.

Will Shell Be Able to Pay Out Its Stock Dividend?

Royal Dutch Shell has not cut its dividend payment since World War II, which adds to the intangible mystique of it being an elite stock. But right now, the Shell stock dividend is sustainable in the short term, but will become increasingly harder to maintain if the low-oil-price environment continues for an indefinite period. (Source: “Can Royal Dutch Shell Sustain Its High Dividends?Forbes, October 7, 2015.)

In short, the company’s dividend payment sustainability is heavily contingent on which direction WTI and Brent crude oil prices take in 2016 and beyond. The trouble is that it doesn’t look as if salvation will be coming for Shell, because oil prices look determined to remain lower for longer.

With its dividend yield sitting at a seemingly attractive 7.5%, Shell will be hard-pressed to maintain ever-growing payments to its stockholders. With further spending reductions in 2016, 2017, and beyond, the Shell stock dividend could be in real hot water. But if the energy company can’t control the price of crude oil, at least it can adjust its financial balance sheet to the best of its ability and count on the market to turn. For an oil producer trying to navigate its way through the tough waters of the low-$40.00s oil market, this is the only hope for Shell at this point.

The Bottom Line on the Royal Dutch Shell Dividend

There’s no use denying it: the Royal Dutch Shell stock price and dividend are in a very difficult situation. The company is a huge multinational corporation, which has now basically had a monkey wrench thrown into its business strategy and is now willing to do anything and everything in its power to survive.

How well this plan plays out is anyone’s guess for the moment, and is almost entirely based on when crude oil prices finally do rally, but also if Shell can reduce its bloated capital expenditures in time to stave off a total collapse in the Royal Dutch Shell stock price.

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