Is Shell’s Stock Dividend in Danger?
It’s no secret that Royal Dutch Shell plc (NYSE:RDS.A) has had a turbulent year, with the oil price collapse hammering away at the company’s financial position, causing the Shell stock price to crash.
The ongoing oil price crash has been catastrophic for energy companies, with crude prices declining by nearly 60% since the summer of 2014. Shell was unfortunately one of the hardest-hit oil majors in this regard and the future may be even bleaker than the oil bears thought only weeks ago.
After the company posted a loss of $6.0 billion in the third quarter of 2015, investors and analysts alike began to have serious reservations as to whether Shell will even be able to pay out its dividend going into 2016. (Source: “Royal Dutch Shell Plc (NYSE:RDS.A): Could Shell Stock Be About To Crash?” Yahoo! Finance, November 5, 2015.)
Why all the pessimism, you might be asking? Well, there are larger events that are simply outside the hands of Shell and other large multinational energy companies.
Crude oil prices are currently achieving new multiyear lows this week, as the bearish news keeps growing for energy companies. With the Organization of the Petroleum Exporting Countries (OPEC) making the decision to not reduce oil production during its December 4 meeting, global oil markets were sent a strong message that no relief will come from the cartel. With none of its members showing a willingness to reduce production, this week’s slide in WTI and Brent could be just the beginning.
But how has Shell reacted to the ongoing low-oil-price environment?
Shell Slashing Expenses, Scaling Down, or Canceling Projects
Shell reported it would be abandoning its Arctic region drilling project, as well as canceling its least profitable North American shale oil and gas plays. The company will also be scrapping the Carmon Creek project in Canada, selling off a good deal of its global assets, and focusing more on lucrative liquid natural gas (LNG) projects.
None of this should surprise investors who have been paying attention to the energy sector. While Shell has certainly had to tighten its belt in the face of collapsing oil prices, it’s far from alone in having to face the reality of sub-$40.00-per-barrel crude. Many of the largest energy companies in the world are implementing similar strategies (Source: “Oil Megaprojects Won’t Stay On The Shelf For Long,” OilPrice, November 2, 2015.)
With oil majors desperate to stop the bleeding off of cash resulting from crashing oil prices, the biggest and most financially intensive projects are first on the list to be cut. With troubled financial balance sheets needing to be brought back within reasonable tolerance levels, upstream exploration and production activities are the first to be reduced. If Shell wishes to maintain dividend payments to its shareholders, the company quickly needs to get a grip on its rising cash flow issues.
Analysts forecast Royal Dutch shell to spend about $35.0 billion towards capital expenditures in 2015, compared to the $45.0 billion it spent in 2013. Now, while this figure is expected to stay at the same level for 2016 and soothes certain investors’ fears, we’re only getting half the story here. The $35.0 billion is the sum total of Shell and BG Group, which is merging with Royal Dutch Shell. (Source: “Shell Steams Ahead With BG Takeover With Promise of More Savings,” Bloomberg, November 3, 2015.)
So when you think of it in those real terms, this is a substantial drawdown of capital expenditures for next year. These reductions are even more profound when it comes to shale oil plays, where the company cut investments from $4.0 billion to $2.0 billion between 2014 and 2015.
To say the road ahead will be difficult is quite the understatement.
Is Shell Able to Pay Its Stock Dividend?
We have to be real here for a moment and analyze just how important dividends are to the company. Royal Dutch Shell has not reduced its dividend payment since the Second World War, a fact that adds to it being perceived as an elite company. For the moment, though, Shell’s stock dividend is sustainable for the short-term, but this could quickly become untenable if oil prices stay lower for longer. (Source: “Can Royal Dutch Shell Sustain Its High Dividends?” Forbes, October 7, 2015.)
To be blunt, the ability of Shell to pay out its dividend rests on which direction oil prices will take in the next year. The reality, however, is that relief isn’t likely to be on the horizon for Shell, as crude prices appear more determined than ever to nosedive.
We could even see West Texas Intermediate crash to less than $30.00 per barrel.
Now, with Shell’s dividend yield sitting at 8.1%, it will be difficult for the company to keep up these ever-growing payments to its stockholders when the oil price keeps dropping. Add to this the spending reductions in 2016, 2017, and beyond, which I mentioned, and Shell’s stock dividend could run into trouble sooner rather than later.
The Bottom Line on Shell Stock
There’s no other way to say it: both the Royal Dutch Shell dividend and its stock price are facing the company’s worst position in years. Shell is a massive international oil major whose business strategy is subject to the movements of the global oil markets. The company is willing to implement any plan in its power to survive the current onslaught of low oil prices, but just how well the strategy of cutting costs and maintaining current dividend payments pays off remains a mystery for the moment. Certainly, it will be contingent on when crude oil prices rebound upward.
If, however, Shell can draw down its overextended capital expenditures in time to avoid a catastrophe, Royal Dutch Shell’s share price just might be saved in time to see the next oil price rally.