Current RDS.A Stock Info

Q4 2017 dividend all-cash, $25 billion in share buybacks

Shell held its Management Day today, outlining the company’s strategy and outlook in the mid-term.

One of the immediate highlights of this presentation is the cancellation of Shell’s scrip dividend program. The company began paying part of its dividend in stock during the downturn, in an attempt to save cash. Rising oil prices and improved efficiencies have finally made such a move unnecessary, so Shell’s Q4 2017 dividend will again be all-cash.

Shell is confident enough that it is confirming its previously-stated plans for a massive share buyback program over the next three years. The company estimates it will purchase at least $25 billion in shares, “subject to progress with debt reduction and recovery in oil prices.”

Shell intends to continue its divestment program, which has already yielded $23 billion for Shell. The company plans another $7 billion in sales, for a total of $30 billion in divestments from 2016 to 2018. These funds have allowed Shell to reduce its net debt, after seeing debt skyrocket in 2016.

Shell is aiming to shift its long-term portfolio, in preparation for the global energy transition. The company is targeting increased gas production, and aims to position itself across the gas chain. Shell is making significant investments into LNG, and believes the market for the fuel has significant underlying strength.

Shell also plans to target new energy sources to reduce its net carbon footprint, including biofuels and hydrogen. The company will increase the capital allocated to this business to $1 to $2 billion per year until 2020, not a large amount for a company the size of Shell, but significant nonetheless.

Overall, Shell plans to decrease its carbon footprint significantly. The company’s current goal is to reduce its carbon footprint by 20% by 2035 and 50% by 2050.

Q&A from today’s presentation

Q: Just firstly on the buybacks, I think you said the intention is over time to offset the dilution from the script dividend. If that’s the case then $25 billion sounds like a small number over time, maybe it looks closer to $50 billion to $60 billion.

RDS: In terms of the numbers and the $25 billion, what does that relate to? That does actually cover the scrip dilution. When you look at the dilution associated with the transaction with BG, it does get up to the $50 billion, $60 billion in total. And, I think, I indicated in speech that we’re looking to first get through the $25 billion commitment, but then also look in the future to increase further buybacks with the goal of ultimately getting through the dilution.

Q: In your speech you mentioned you accept the risk that some resources will become stranded in this energy transition. I wonder if we assume you deliver the first target which I think is a 20% reduction to your carbon footprint by 2035. What do seem happens in terms of resources being stranded, so what proportion of your resource would be stranded in that scenario?

RDS: So, the ambition that we set for reducing our carbon footprint is the carbon footprint of the products that we sell, very important to bear that in mind. Because quite often, it is forgotten how it all works. We sell twice as many products as we refine, roughly, and we refine twice as many barrels as we produce. So, in the end, the only thing that really matters for society is that the energy products that we put into customer’s hands to enrich their lives with need to have overall a lower carbon footprint over the entire life cycle of where that amount of energy came from.

Now, and that I believe is in the end also, what society needs to deliver on the back of the various comments. And we have put our ambition in place to be in line with society and as a matter of fact, that means that we have to run a bit harder in society because our current product mix is very much dominated by oil and gas type of energy products.

So that’s again a bit of clarification of what I said. What does it mean in terms of stranded assets? Well, that’s not necessarily a correlation between one and the other. Because still, going forward, certainly towards the end of the next decade or even after that, there will be a need for oil and gas in that mix. As a matter of fact, there will be higher need for oil and gas investments in that mix because no matter how hard, the world will continue to drive to a lower carbon energy system, lower carbon footprint, the rate with which existing resources will deplete is much faster. So, the world will need to invest continuously in new oil and gas projects.

And therefore, there is still relevance for business model that relies on investment in these resources. Now, of course, some resources will be better placed than others. And what Andy has been doing and Michael for that matter as well, is continuously find our way to the best part of the creaming curve. So, the lowest cost assets that will continue to be competitive and also those projects that are, what I said, climate-competitive so, very low carbon footprints.

Because ultimately, even if you get to a 50% reduction by 2050 in the carbon footprint of the energy products, we will still need to have investments in oil and gas. And, again, it’s a bit like the last person standing story with refining. If you have the best positions to enjoy, you will be enjoying delivering that portion of oil and gas that society is inevitably still going to need.

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