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Shell signals an end to the oil downturn with return of all-cash payouts

Jillian Ambrose: 

Royal Dutch Shell has signalled the end of the three-year oil market downturn by restarting its all-cash shareholder payouts as its cash flow begins to boom.

The oil major began paying out dividends in the form of shares in 2015, in the wake of the oil price crash and its $50bn takeover of BG Group.

But chief executive Ben van Beurden said the Anglo-Dutch group was now confident that it could call an end its scrip dividend as its cost-cutting and divestment programme pays off.

The leaner business will also enable Shell to double down on its investment in ‘new energies’ including low-carbon fuels and renewable electricity.

At a management day in London Mr Van Beurden told investors that the rising oil price together with the group’s post-merger overhaul would drive its free cash flow a fifth higher than expected by the end of the decade.

Last year he predicted Shell would generate $25bn of cash flow, over and above what it needs to cover its expenses, by 2020. This ambition has grown to $30bn in its latest investor update.

As a result, from the fourth quarter all payouts will be in cash, and Shell will begin the $25bn process of buying back the shares that have been paid in lieu of cash dividends by the end of 2020, he said.

“We have increased our outlook for organic free cash flow, which has been consistently strong over the past five quarters. We have also made significant progress with our divestment programme, allowing us to reduce net debt in that time. Meanwhile, we intend to cancel our scrip dividend programme with effect from the fourth quarter 2017,” he added.

The group will also double its spending on low-carbon energy from $1bn a year to $2bn as it ramps up its ambitions for biofuels, hydrogen and renewable energy while shifting its fossil fuel focus from oil towards a gas-heavy portfolio.

“We can only remain a leading company if we evolve Shell in line with societal expectations. And today we will set out our ambitions for the future as well as the business levers we will pull to thrive in the energy transition of the 21st century. Let me be absolutely clear and categorical: Shell supports the Paris Agreement and its goal of keeping the rise in global temperatures below 2°C,” Mr Van Beurden told investors.

He added that Shell planned to cut its total carbon emissions in half by 2050 and by 20pc by 2035, including the emissions from energy products that it buys from third parties and sells on to customers.

“By including the full range of emissions, including those produced by using Shell’s energy products, we aim to help customers with their own emissions through the solutions we offer. We believe this is the right way to evaluate our performance and our contribution to society,” he said.

Mr Van Beurden added that the drive to become a cleaner company would be undertaken “with sound financial discipline”.

The group has faced an uphill battle to kick-start cash flows after oil prices plunged to $28 a barrel lows at the start of last year, and its debts climbed to almost 30pc of its earnings following the BG Group deal.

Shell reduced debt gearing to 25.4pc at the end of the third quarter and said that after another $5bn of divestments its 20pc gearing target “is in sight”. The group is nearing the end of a major $30bn sales drive, which included selling a large package of North Sea assets.

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