How Does Shell Plan To Enhance Its Shareholder Returns?
The ongoing commodity down-cycle has taken a toll on not just the profitability of oil and gas companies, but has also severely impacted investor returns over the last three years. Oil and gas producers, including some of the large integrated energy companies, were forced to either suspend or restrict their dividend payments, in order to remain afloat in the oil slump. However, with the extension of the production cuts by the Organization of Petroleum Exporting Countries (OPEC), the outlook for commodity markets has improved. This has allowed some of the oil and gas players to reinstate their dividend payments and increase their share buyback authorization for the forthcoming quarters to reinforce investor confidence. In this note, we discuss the steps undertaken by Royal Dutch Shell (NYSE:RDS.A) to enhance its shareholder returns.
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Reduction Of Debt
Since the completion of the BG Group acquisition in 2016, Shell has accumulated a large amount of debt on its books. The company’s net debt more than tripled from $21 billion at the end of 2015 to over $66.6 billion at the end of the third quarter of 2016, taking its leverage, or net debt-to-equity ratio, from merely 13% to over 35% during the same time-frame. However, since then the company has been making consistent efforts to bring down its debt obligations. In the last four quarters, the company has repaid almost $10 billion of its total debt, bringing down its gearing ratio (same as leverage ratio) to around 30% at the end of the latest quarter. Further, the company plans to utilize the proceeds of its divestment program, expected to be $30 billion by 2018, to further reduce its gearing ratio to 20% and maintain a strong credit rating of AA. A lower debt position will not only enhance the company’s capital structure, but will also result in lower interest obligations, which will, in turn, enhance its bottom-line and shareholder returns.
Cancellation Of Scrip Dividend
Ahead of the OPEC’s meeting in Vienna, Shell announced the cancellation of its scrip dividend program and reinstated its cash dividend with effect from the declaration of the interim dividend for the fourth quarter of 2017 in February 2018. Along with this, the company also highlighted that it expects its annual organic free cash flow to be around $25-$30 billion by 2020 (at $60 per barrel Brent oil price), $5 billion higher than its outlook back in June 2016. This comes as a great news for the shareholders, who will receive their complete dividend payments in cash from the company going forward, unlike previously when they had an option to receive their dividend in cash or shares. The move is indicative of the company’s willingness to share its growth and higher cash flows with its shareholders in the form of cash dividends.
Shell’s Dividend History
Share Buyback Program
Further, Shell has confirmed its plans to extend its share repurchase program to at least $25 billion, to be completed between 2017 to 2020, subject to the progress of company’s debt reduction program and the overall recovery in oil prices. This is consistent with the company’s intentions stated at the time of the BG Group acquisition. While the company will be able to repurchase shares only after it has met its debt reduction and dividend payment requirements, it aims to use its surplus cash flows from operations to buy back its shares. Since the company had discontinued its share buyback program in the second quarter of 2015, the latest news serves as a positive event for the company and its shareholders. Not only will this allow the company to improve its earnings per share, it will also enhance its shareholder return.
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