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Market Digest Nigeria

Business

Shell shocks investors, reduces dividend, first time since the 2nd world war

British Dutch oil and gas giant, Royal Dutch Shell Plc, for the first time since the second world war has cut the dividend paid to its shareholders by two-thirds.

Shell Stock Is Reeling From Dividend Cut & Looming Oil Disaster

This is in reaction to the coronavirus pandemic which has had a negative impact on the oil and gas industry globally.

Global oil demand, which has taken an unprecedented plunge, coupled with the historic crash in oil prices has triggered economic crises in most countries, thereby affecting their GDP growth adversely.

The decision by Shell came as a surprise to many, including shareholders of the company, which is by far the biggest payer of dividends in the FTSE-100, providing income to millions of pension fund investors. The two-thirds cut in its dividend translates to 16 cents a share.

According to some analysts, this is far below the expectations of many investors.

The Chief Executive Officer of Shell, Ben van Beurden, in an interview with Bloomberg TV, admitted that they had to reset their dividend to a level that they believed was affordable.

However, the CEO’s statement and the actions of the oil and gas firm, heavily contradicts van Beurden’s earlier statement 3 months ago, when he said that they were not going to reduce dividend, as lowering the dividend was not a good lever to pull if one wanted to be a world-class case. With Shell’s reduction of dividends, which many long-term investors had come to almost view as an annuity, other major oil firms might follow suit as they have also been hard hit by the oil market crisis.

Although Shell defended the reduction in dividend as an unavoidable decision due to the coronavirus pandemic, some critics said that the company’s shareholder returns were not encouraging, even before the virus outbreak, and as such had slowed its share buyback program.

They had long warned that the company was too leveraged after the acquisition of the BG Group, a natural gas producer. Despite the high level of debt, the board approved the share buyback program, thereby further straining its balance sheet.

This outcome is not unexpected, since many oil and gas companies, including the majors in Nigeria, are struggling and barely managing to survive, as they have been deeply affected by the global oil crisis which was triggered by the coronavirus outbreak.

They have introduced several measures which include cost reduction, staff reduction, and a downward review of contracts with oil service firms, in order to survive. This has seriously threatened their ability to repay their debts to the banks.

Just yesterday, Seplat Petroleum Development Company declared a loss of about N42 billion in its first quarter result for 2020. The negative result was heavily influenced by the global oil crisis which has affected demand and oil prices.

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