Oil Majors Are Leading The Recovery Race

In a sign that the oil majors have survived the three-and-a-half-year oil bust and are back on solid ground, Royal Dutch Shell announced that it will restore its full cash dividend.

Shell hasn’t paid the full cash dividend in over two years, instead offering investors shares in lieu of payment. But with debt falling significantly over the past year, cash flow improving, and an improved oil market outlook, the company chose to dish out some of the rewards to its shareholders. Shell also said that it would buy back $25 billion worth of shares by 2020, roughly the equivalent to the amount of shares that it issued instead of paying the cash dividend.

Shell follows BP and Statoil, which both made similar announcements in recent weeks. BP said it will begin buying back shares and Statoil said it will end its scrip dividend and return to cash payments. But Shell’s decision to pay the full cash dividend is notable because it had become one of the most indebted oil companies in the world after its $50 billion purchase of BG Group.

Taken together, the moves to step up payments to shareholders is a sign that the oil majors are feeling much more confident than they were in recent quarters. Shell increased its guidance for free cash flow from a prior range of $20 to $25 billion through 2020, up to a new range of $25 to $30 billion—a level that assumes oil prices trade at an average of $60 per barrel. The “strategy update shows an encouraging increase in future cash flows,” said Simon Gergel, chief investment officer of equities at Allianz Global Investors, according to Bloomberg. The restoration of the cash dividend “reflects their improving cash-generation profile,” he said.

The sharp improvement for Shell is the result of several years of cost-cutting, asset disposals and efficiencies that have helped drive down the cost of production. Also, some high-profile projects have reached completion, easing the spending burden while also adding new sources of revenue.

The acquisition of BG Group transformed Shell into the largest LNG exporter in the world, but it also raised eyebrows because of the stratospheric debt that it required. Now, with the Anglo-Dutch company paying down debt, improving its cash position, and restoring its cash dividend, the acquisition of BG Group looks much better. Simon Gergel of Allianz Global Investors said the “well-timed purchase of BG near the bottom of the oil price cycle” is paying off.

But, Shell’s CEO Ben van Beurden also cited a culture change at the company, focusing on “financial outcomes” instead of “engineering wonders.”

“There is a deep transformation in our ways of working,” van Beurden said.

Meanwhile, Shell’s strategy review included a few other interesting tidbits. CEO Ben van Beurden said that the company would increase spending on renewable energy, targeting a range of $1 to $2 billion by 2020, up from the current guidance of $1 billion. Shell also aims to slash its carbon emissions by 20 percent by 2035 and by half by 2050.

One of the main ways the company will achieve this is by increasingly pivoting towards natural gas, which has a cleaner profile than oil, while also slowly ratcheting up spending on clean energy. Shell announced earlier this week that it plans on partnering with European automakers to build out fast-charging infrastructure for electric vehicles. Shell acquired NewMotion, the largest EV recharging developer in Europe.

Shell’s van Beurden tried to reassure shareholders that while the investments in clean energy will gradually scale up, he will also try to wring more returns out of its core fossil fuel business. The restoration of the full cash dividend is a clear signal that things are moving in the oil majors’ direction.

“After three years of the downturn, the buyback is signaling the cost structure has adjusted,” Jason Gammel, an analyst at Jefferies LLC, told Bloomberg last month after BP announced a share buyback. “Depending on if oil stays at sustainable levels of $50, the industry is out of the worst. It’s a bonus with $60 oil.”

By Nick Cunningham of Oilprice.com