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Royal Dutch Shell cuts costs by US$9bn to protect finances from coronavirus but dividend safe

“The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past"

Royal Dutch Shell Plc - Royal Dutch Shell to cut costs by up to US$9bn to protect finances from coronavirus

Royal Dutch Shell Plc (LON:RDSB) saw its shares rise on Monday as the oil giant said that it is taking action to “reinforce financial strength and resilience” and to position the company for economic recovery following the Covid-19 coronavirus pandemic, but there are no plans to cut its dividend.

Shell said it is scrapping its share buyback programme and removing some US$5bn from its capital spending budget, which will now stand at US$2bn for 2020, and it plans to slash underlying operating costs by US$3bn to US$5bn over the course of the year.

READ: Shell deemed “most vulnerable” by City analyst

It is expected these changes will contribute around US$8bn to US$9bn of free cash flow over the current twelve-month period, with the company saying that it also remains committed to its planned US$10bn asset divestment programme.

“As well as protecting our staff and customers in this difficult time, we are also taking immediate steps to ensure the financial strength and resilience of our business,” Ben van Beurden, Shell chief executive said in the statement to investors.

“The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past.”

Shell said it will seek to maintain strong financial credit metrics and ensure its balance sheet remains robust. The company added that it has around US$20bn of cash and equivalents plus US$10bn of undrawn credit lines.

Very proud dividend record

Russ Mould, investment director at AJ Bell, commented: “Major oil producer Royal Dutch Shell has a very proud dividend record where it hasn’t cut its payout since the Second World War. Perhaps this explains why, unlike many other companies, it is not yet cutting its dividend let alone suspending it despite the escalating impact of the coronavirus outbreak and the containment measures launched in its wake.

“With a yield well into double digits the market is clearly pricing in action on the dividend sooner rather than later. Perhaps there might even be a bit of relief if such a decision were to be made."

He added: “For now the company appears to be attempting to stave off this difficult call by curbing its share buyback programme while cutting costs and expenditure.

“There may be question marks over its capacity to make the business leaner than it is already given that significant cost savings were made in the wake of the 2014 to 2016 oil price crash.

“And while the company is apparently committed to its $10bn asset disposal programme, it remains to be seen if it could find any parties who would be genuinely committed to buying assets in the current environment."

Mould concluded: “Shell has been through testing periods before, not least a big reserves scandal in the mid-noughties, but it’s hard to think of a CEO at the company who has been dealt a more testing hand than current incumbent Ben van Beurden.

“If its short-term challenges weren’t enough, there is the ongoing challenge associated with addressing mounting concern over its contribution to climate change.” 

In late morning trading, Shell's A shares were 1.8% higher at 1,080.80p.

  -- Adds analyst comment, share price --

Quick facts: Royal Dutch Shell PLC

Price: 1312.6 GBX

Market: LSE
Market Cap: £102.51 billion

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