Uit FT (Lex):
You may not be aware of it but oil prices have been declining. If you have noticed this oft-overlooked trend, Shell’s fourth quarter update, released on Wednesday, will not surprise you. The company is going to cut more costs and sack more people. Given the behaviour of oil prices, this was as inevitable as the rising of the sun this morning. Yes, earnings will be a bit lower than the average consensus estimates but brokerage analysts are professional optimists. Shell’s announcement was only meant to provide lawyer-grade explicitness ahead of the shareholders vote on its acquisition of BG next week.
So the interesting questions about Shell are unaffected. Is the BG deal still a good idea? And should Shell consider cutting its dividend?
It would be natural to think, given that the oil price has halved since it was announced in April, that the BG deal must, by now, be grossly overpriced. It probably is overpriced — it looked that way when it was announced — but probably not grossly so. Shell is right to strike a deal in the midst of the turbulence. If an oil major commits only to acquiring pro-cyclically, when things look good, it might as well get out of the business.
Note also that the consideration paid to BG shareholders is 70 per cent Shell shares. The decline in Shell’s price has therefore brought the value paid per BG share down by almost a third. Finally, bear in mind that any alternative targets for Shell would demand higher premiums now that their share prices have fallen. Solvent companies, presumably the sort Shell would want to buy, do not do fire sales.
And so to the dividend. Shell has no immediate need to cut it. In 2015, operating cash flow, after capex was taken out, probably left about $8bn of the $9bn of cash dividends uncovered. Another $5bn was found this year through asset sales, though. Debt rose only moderately.
Longer term, one lesson from the deflation of the commodity bubble is that fixed or progressive dividend policies are a poor fit for natural resource companies. These policies limit investment options at the time when assets are cheap and can increase debt when it is least welcome. A dividend at a set proportion of earnings makes more sense. It might be worth risking the ire of income investors to make it clear to the market that owning an oil company for its steady cash flows is an absurd idea.