Royal Dutch Shell Plc is “pulling out all the stops” to safeguard its dividend in a world where oil prices remain “lower for longer,” Chief Executive Officer Ben Van Beurden said. 

Europe’s biggest oil company is also protecting a plan to buy back shares and keeping its investment program “steady for the future,” Van Beurden said in e-mailed comments before a speech in London on Tuesday.

Oil’s collapse in the past year has forced Shell and its peers to reduce costs, defer projects and hunker down for a prolonged period of low prices. Even with crude trading for about $50 a barrel, Van Beurden and BP Plc boss Bob Dudley have made dividends their top priority. Shell has weathered market ups and downs for seven decades -- including oil at less than $10 in the 1980s and 1990s -- without cutting shareholder payouts.

The company is “geared to generate cash flow from operations and free cash flow in 2017 and beyond,” Van Beurden said. “Shell is planning for a longer period of low prices.”

Shell’s debt-to-equity ratio gives it the flexibility to maintain dividends, he said. The company expects to cut operating costs by about $4 billion, or 10 percent, this year and will reduce capital expenditure by 20 percent. The weakening oil market has forced Shell to shelve projects including an oil-sands mine in Canada and a liquefied natural gas terminal in Australia.

The oil slump drove Shell’s annual dividend yield to 8.1 percent on Sept. 28, the highest in at least 20 years. The measure -- the annual return divided by the share price -- was at 7.2 percent on Monday compared with 4.1 percent for the benchmark FTSE 100 Index.

Some oil majors have mitigated the impact of crude’s decline by bolstering the share of natural gas in their output. The Hague-based Shell and Paris-based Total SA now produce more gas than oil and have promoted the fuel as a cleaner alternative to coal, which dominates electricity output worldwide.

“Gas is a fossil fuel, yes, but a crucial one for the building of a low-carbon future,” Van Beurden said. “When burnt for power, gas produces around half the CO2 and one-tenth of air pollutants that coal does.”

David Fuller's view

Royal Dutch Shell has not cut its dividend since I was a small child in the early 1940s, but global economic conditions were somewhat tougher back then.  More recently, some institutional long-term holders of Shell have reduced their holdings in this company for various reasons, including fears that the dividend would have to be cut, to the possibility that ‘we would be forced to stop using fossil fuels because of climate change.’  Really?  I do not think that even Jean Paul Junker or any of his similarly unelected bureaucrat colleagues would say that.

Royal Dutch Shell (weekly 10-Yr & 5-Yr) (est p/e 13.54 & yield 6.96) should be able to protect its dividend, or if it cannot, we should probably plan to head for that planned, luxury, 3D printed space station on Mars.

Interestingly, RDSB formed an upside weekly key reversal last week and has had strong upside follow through in the last two days.  This is at least a good technical rally and Brent crude oil’s breakout (note also the weekly upside key reversal in late August) can support further strength towards the MA.  

Shell should become the world’s largest independent producer of natural gas before the end of this decade, although those plans have been slowed by the retrenchment necessitated by the slump in commodity markets. 

(See also yesterday’s lead item.)