BP PLC (LON:BP.) and Royal Dutch Shell Plc (LON:RDSB) this week delivered deep and detailed investor updates in lieu of financial results statements, though perhaps the most important piece of commentary was notable for its absence.
Neither Shell nor BP had anything to say about their dividends – plainly a deliberate omission in these extremely uncertain and rapidly-changing times.
Both firms confirmed cutbacks on lower priority progammes with Shell slashing US$5bn off the capex budget for 2020 and BP losing US$4bn from its schedule.
Similarly, both detailed cutbacks in operating costs as they both aim to preserve cash as crude price linger in the doldrums (every US$1 move in oil prices is worth about US$600mln to Shell and US$340mln to BP).
Demand is weak and the economic impacts of something like coronavirus are unprecedented.
Whilst blue-chip equity prices have taken a hiding and investor sentiment remains poor, one would surely expect reassurances over dividend, not least because income-centred shareholders are increasingly the target for investor relations now that thoughts of growth have long fizzled away.
Is no news good news?
So, why no word from either Shell or BP?
Analysts at Jefferies claimed, in a note, last week that London’s ‘big oil’ dividends are “safe for now” even if they aren’t sustainable for very long.
Jason Gammel, analyst at the American investment bank, said: “The financial condition of the sector was reasonably strong entering the downturn and companies have ample liquidity to fund what will likely be cash-flow deficits in 2020 and 2021.”
“We expect that dividends in the sector are safe for now, but if Brent prices remained at US$30 through 2021 balance sheet deterioration would bring the dividend into question.”
He did further caution though that “nothing works” at US$30 per barrel crude and that shareholder expectations for increased returns are no longer viable.
Today, a barrel of Brent crude is priced at around US$25 and daily pricing continues to be volatile and appear susceptible to more decline – only yesterday, the market was warned of a fresh “Saudi wave” of production and US stats indicated domestic crude was also being pumped in higher volumes.
Against a backdrop of pandemic and restricted economic activity, major oil producing regions are grasping for market share whilst evidently racing to the bottom.
So, turning back to London’s oil dividends …
Jefferies reckoned Shell’s dividend (should it be retained) would exceed free cash flow by US$12.1bn through 2020 and 2021.
For context, the Anglo-Dutch firm paid out just over US$15bn to shareholders last year.
Paying the full dividend could be feasible, given that Shell at the end of Q1 had US$20bn of cash and around US$22bn of credit facilities available to it.
BP’s dividend would meanwhile exceed cash flow by around US$7.5bn over 2020-21, according to Jefferies.
In 2019, it paid out around US$8.3bn to shareholders.
Its financial wherewithal, as detailed on Wednesday, amounted to US$32bn at the end of Q1 and the firm is continuing an asset divestment programme with some US$10bn of phased payments already due and another US$15bn of sales targeted by mid-2021.
Again, it begs the question: What is happening with the dividend?