Neil Collins’ Notebook – The cost of not Shelling out
Have the directors of Royal Dutch Shell made a life-threatening strategic error? It’s not their actual lives that might be threatened, of course, but that of the company they head as an independent business. Consider: in the fortnight since they shocked the markets by cutting the quarterly dividend from 47c to 16c, the shares have plunged by nearly £2.
The income funds that had Shell as their banker have been sent reeling, and a stock that currently appears to yield just 4 per cent with Shell ‘B’ shares at £12.60 is hardly attractive to those investors requiring quick cash returns. The background to the decision could hardly have been worse, with the price of crude oil in inland US turning negative, a deepening world recession thanks to Covid-19 and a balance sheet that was starting to look uncomfortably stretched.
The detail of Shell’s announcement reinforced this bleak view. The board could have chosen to pay and warn about prospects; it could have suspended payment, promising a longer-term decision in three months’ time. Instead, it clearly signalled its belief that the old dividend was more than it could afford, with the dreaded word “reset” in the explanation for what appears to be an entirely arbitrary reduction.
Shareholders can forget any hope of a quick restoration. Sixteen cents a quarter is the new normal. For good measure, the company formally abandoned the share buyback programme, much of which was executed last year at prices that look highly embarrassing today.
So, prudent or panicky? Of the two UK majors, BP appears to have the weaker balance sheet, yet it held the payment. More to the point, so has Exxon, the world’s biggest oil company, and whose balance sheet looks a good deal stronger than Shell’s, with or without the dividend cut.
These days, the oil market is fast-moving. The price has stabilised, and some talk of a return to a supply/demand balance as early as next month. Brent crude hit $30 this week. There seems little doubt that the big three players in this market – Russia, Saudi Arabia and the US – have been shaken by recent events. All desperately want a way to heal their self-inflicted wounds, so production will fall, either by state diktat or pressure from lending banks. Demand, meanwhile, is probably close to its nadir, as countries round the world abandon lockdown and try to stimulate their stalled economies.
Shell shares, meanwhile, for long supported by that uncuttable dividend, are all over the place. The shareholders are Shell-shocked. The market value is under £100bn, while Exxon is worth $190bn. Students of history will recall that BP’s transformational deals for Atlantic Richfield and Sohio both followed periods when crude prices were under pressure.
Even before Covid-19, the oil industry was under sustained fire from the climate change lobby, and the virus has brought the prospect of peak oil demand closer. The classic response of companies in declining industries is to merge, and big oil “mergers” happen following crises. They don’t come much bigger than this one. The Shell board could get a very nasty surprise.
Who knew it was this complicated?
When investors woke up to the fact that Greggs was not another chain of sandwich shops, but a well-managed, innovative bakery chain, the shares took off, multiplying five times in two years, to a value of £2.5bn at the start of this year.
Then came the virus, and pole-axed a business which might have been designed to minimise social distancing. Most of the 2000 stores are now shut, the shares have fallen by more than a third, but both Numis and Shore Capital rate them a sell. Clive Black at Shore sees “an earnings and dividend wipeout”.
It’s all pretty brutal for CEO Roger Whiteside and his talented team. Greggs’ remuneration committee, under Sandra Turner, has just produced a new scheme, promising “transparency”. So will the bakers clean up? Well, Ms Turner’s report is an indigestible 27 pages long, a fine example of the remuneration consultant’s art, so who knows? Mr Whiteside will need his own expert just to check he’s not being diddled by his own company.
Delayed departure
It’s a tough job running Heathrow airport. One day you’re fighting for permission to build a third runway to cope with booming traffic, and the next you’re trying to stay solvent when the planes don’t come to the existing two. CEO John Holland-Kaye tried to make the best of it in front of MPs this week, but had to admit that the virus had put off need for a third runway by 10 years.
Beyond his remit is that other non-flying white elephant, the third rail route from London to the north west. If the £100bn HS2 could ever be justified, it surely cannot be now, as empty trains fly up and down existing tracks and state spending runs away. How about “Scrap HS2 and support the NHS” as a slogan?