The recent improvement in the energy space is likely to encourage top global energy companies to resume cash dividend payouts and share buyback programs to boost investors’ confidence. In this regard, the Anglo-Dutch energy giant, Royal Dutch Shell plc RDS.A — which is set to observe Management Day on Nov 28 — is likely to announce the resumption of cash payments on the back of improving financial picture of the company.
Adoption of Scrip Dividend to Ease Cash Flow Woe
As low oil prices over the past three years weighed on the energy companies' top and bottom lines, the industry was forced to chalk out new strategies and resort to dividend cuts and cost-reduction initiatives to shore up cash flows. The downturn not only impacted the smaller and the more-leveraged companies, it also affected the fairly larger companies (generally considered safe haven investments). They were forced to cut or suspend cash dividend and share buyback programs.
Supermajors including Shell started offering scrip dividends to shareholders, instead of full-cash dividends. The increasing reliance on scrip dividends helped these companies to ward off cash flow problems. It eventually, along with other cost-containment efforts and divestment initiatives, enabled the companies to strengthen their financials and improve the cash flow generation.
Strong Results Buoy Optimism
Thanks to rebounding oil prices and strategic initiatives, Shell finally managed to successfully come out of the slump. The company’s solid third-quarter results reiterate this fact. It delivered EPS of 98 cents, ahead of the year-ago adjusted profit of 70 cents. For the nine months ended Sep 30, 2017, Shell reported earnings of around $11.5 billion — a whopping 113% surge compared with the year-ago period.
In the quarter, Shell generated $7.5 billion and $3.7 billion from cash flow from operations and as free cash flow, respectively. Shell raked in $28.4 billion in cash flow from operations during the first nine months of 2017, up 148% from the $11.4 billion recorded in the corresponding period of 2016.
As of Sep 30, 2017, the company had $20,699 million in cash and $88,356 million in debt with Net debt-to-capitalization ratio of 25.4%, down from 29.2% a year ago. The scrip dividend payments has also gone a long way in easing pressure on Shell’s balance sheet which was hurt by the $50-billion BG Group acquisition and soft oil prices.
Shell has benefited from its integrated model and has generated enough cash to pay off debt along with funding capex and dividend payments. Notably, the company has reduced its break-even point to $47 a barrel currently, reflecting a 60% decline from the $120 a barrel threshold in 2013.
Notably earlier this month, Shell’s CFO announced plans to lower debt and scrap off scrip dividends, and eventually resorting to buyback programs.
Cash Dividend in the Cards?
Post the robust quarterly results, supermajor BP plc BP was the first company to call off scrip dividend. The company also commenced its share repurchase programs. TOTAL S.A. TOT is set to do away with the discount it gives on the scrip option in 2018 following the strongest quarterly earnings in the last two years, pointing to brighter prospects and improving cash flow generation. Statoil ASA STO also announced plans to re-start paying full-cash dividends from the next quarter, putting an end to its two-year scrip program.
The strengthening financials and overall dynamics of the industry make us optimistic of the announcement of the abandonment of Shell’s scrip dividend program and revival of cash dividends.
By: Zacks Equity Research.
Photo: Shell.
Review: Emerging Market Formulations & Research Unit, Flagship Records.