Shell Issues Warning on Buyback, Debt Efforts -- WSJ

By Sarah McFarlane 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 1, 2019).

LONDON -- Royal Dutch Shell PLC said it may have to slow down a share-buyback commitment it made to investors after a big natural gas deal -- the latest sign of pressure on Big Oil amid lower crude and gas prices.

Oil companies have traditionally rewarded investors richly -- and reliably -- via dividends and buybacks, even amid volatile commodities prices. The steady payouts, though, have become harder to sustain after a prolonged period of lower oil prices, following a collapse from over $100 a barrel five years ago, to around $60 now.

BP PLC Chief Financial Officer Brian Gilvary added to investor unease earlier this week when he suggested the company was unlikely to raise its dividend in the fourth quarter, while it focused on paying down debt. After BP shares fell, the company issued a statement the next day to clarify that it had yet to decide on the fourth-quarter payout.

Shell on Thursday said it still intends to buy back $25 billion worth of shares -- a promise it made after its $50 billion acquisition of U.K. natural gas giant BG Group in 2016 -- but that it may now take longer to reach that figure. So far Shell has completed $12 billion of buybacks. It had planned to finish the program by 2020, but now thinks lower energy prices make that timing uncertain.

Shell also said market conditions may make its plan to reduce its debt-to-equity ratio to under 25% more difficult. Debt currently stands at about 28%.

"The prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback program within the 2020 time frame," Chief Executive Ben van Beurden said in a statement.

The caution prompted Shell's B class shares to trade 3.7% lower.

When Shell committed to the share buyback plan it had assumed $65 a barrel oil in 2019 and stronger chemical and refining margins, Chief Financial Officer Jessica Uhl said on the company's earnings call. The reality of lower oil and gas prices and weaker margins, if they persist, "translates into an eight to nine billion dollar impact on our cash in 2019-20," said Ms. Uhl.

Shell will now have to decide whether to slowdown the share buyback to maintain a robust balance sheet, or keep purchasing stock at the expense of higher debt. Shell didn't indicate whether it might prioritize one over the other.

"Common sense suggests the balance sheet is much more important than an arbitrary target on the buyback," said Biraj Borkhataria, co-head of European energy research at RBC Capital Markets.

The caution on buybacks came as Shell reported third-quarter results that outperformed peers like BP PLC and Total SA, whose earnings were hurt by weaker oil and gas prices.

The Anglo-Dutch oil giant reported profit on a net current cost-of-supplies basis -- -a figure similar to the net income that U.S. oil companies report -- for the three months ended Sept. 30 of $6.08 billion, compared with $5.57 billion in the year-earlier period.

Downstream results for all three European majors were better than analysts expected, however, with BP citing high utilization of its refining capacity and Shell noting strong trading revenue.

Exxon Mobil Corp. and Chevron Corp. are due to report results on Friday.

Write to Sarah McFarlane at [e-mail]

(END) Dow Jones Newswires

November 01, 2019 02:47 ET (06:47 GMT)

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