Oil companies’ shareholder return is raising some controversy

On the 11/05/19 at 7:36AM


Yves-Marc Le Réour

Shell raises doubts on the timing of its future share buybacks, while BP is evasive on its dividend.

A downgraded environment in the sector has caused some European oil companies to shift their shareholder return policies. Royal Dutch Shell, which reported its quarterly results last week, took that opportunity to launch a new tranche of its share buyback programme, amounting to as much as $2.75bn (€2.46bn) over a period extending to 27 January 2020. The major had announced in June that it planned to return $125bn to its shareholders in the form of dividends and share buybacks between  2021 and 2025, assuming an average oil price of $60/bbl.

In the shorter term, the Anglo-American oil group had set a $25bn share buyback target by the end of December 2020, based on a $65/bbl. oil price, without undermining its financial structure. “The prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback programme within the 2020 timeframe," said Ben Van Beurden, CEO of Shell.

As of 30 September, its gearing ratio came to 27.9%, up from 27.6% at the end of June and 23.1% at the end of September 2018. The ongoing squeeze on fossil fuel prices will probably force it to take “more time” to comply with its commitments, CFO Jessica Uhl said. The group’s adjusted net profit fell by 15% in the third quarter of 2019, to $4.8bn.

“The cautious note on the pace of reducing the debt ratio and the implementing of a $25bn share buyback programme seems a little disconcerting”, said Colin Smith, an analyst at Panmure Gordon. “Common sense suggests the balance sheet is much more important, especially as the group will continue to buy back shares after 2020”, said Biraj Borkhataria, an analyst at RBC Capital Markets.

Raise shareholder return

Also last week, BP was vague on its dividend policy for the fourth quarter of 2019 or the longer term, hinting that it may postpone to early 2020 its decision to raise its shareholder return. “The lack of a dividend hike at BP and Shell management hinting at a possibly slower pace of share buybacks are suggesting companies are taking a more sober view on the outlook for oil and gas prices”, Morgan Stanley said. 

Thanks to fast-growing chemicals and oil distribution businesses, Repsol managed to offset some of the negative impacts of falling oil prices during the past quarter. On Thursday it reported adjusted net income of €522m on an annualised basis, down 11.3%, far above the consensus €476m forecast. Its net debt rose by 4.8% to €3.8bn from one quarter to the next, but the Spanish oil giant is counting on its ability to generate sufficient operating cash flow to buy back as much as 5% of its total shares. In addition, it plans to raise its dividend by 8% annually on average between now and 2020. ““Our longer-term concerns mainly relate to re-investment risks with free cash flow, with uncertainty around both upstream and the new energies pipeline”, the RBC Capital Markets analyst said.

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