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Falling revenues likely to put Shell’s plan for share buyback in limbo and debt into orbit

March 17, 2009

Robin Pagnamenta, Energy and Environment Editor

Royal Dutch Shell is to scrap its share buyback programme and more than double its debt this year as it struggles to maintain its spending commitments in the face of a collapse in the price of crude, analysts have warned.

With oil trading at $44 this week down from a $147 peak last July, Jeroen van der Veer, the chief executive, will announce details of the Anglo-Dutch oil giant’s strategy today at his final annual investor briefing before he steps down this summer.

Mr van der Veer is expected to reiterate Shell’s commitment to a 5 per cent increase in its dividend. But the oil group is also believed to be considering measures that will allow it to do so while continuing to invest $31 billion (£22 billion) on a string of oil and gas projects around the world. Shell announced a 5 per cent increase in its dividend for the first quarter of 2009 to 42 cents per share.

Gordon Gray, an oil analyst for Collins Stewart, said that a big increase in Shell’s debt was inevitable while share buybacks were “completely off the agenda”. He predicted that Shell’s net debt would rise from $8 billion in 2008 to as much as $23.9 billion this year – from a gearing level of about 6 per cent of its equity to nearly 17 per cent.

He projected that Shell’s net debt could peak next year at more than $30 billion, depending on how long oil prices remained depressed.

In a note to clients, Neil McMahon, a Sanford Bernstein analyst, suggested that Shell’s dividend would be static for two years: “Shell has the highest capital expenditure budget in 2009 [of any of the oil majors] and in a year when cashflow is set to be a challenge, we envisage that Shell may need to increase debt and cut buybacks in order to maintain flat dividends.”

The falling oil price has fuelled concerns about the ability of oil companies to pay increased dividends while meeting their investment needs.

In the fourth quarter, Shell’s cashflow from operations was $10.3 billion, while capital spending plus distributions to shareholders, including dividends and buybacks, was $9.5 billion.

Shell’s crude output has been under pressure this year because about 20 per cent of its oil production is from Opec member countries, where quotas have been slashed by about 14 per cent.

Richard Griffith, of Evolution Securities, predicted that Shell would be forced to increase its net debt from $8 billion to $16 billion this year. However, he said that the group’s dividend was safe because, at about 6 per cent, Shell’s overall gearing level was significantly lower than rivals such as BP, which has gearing of about 20 per cent. “Shell has much greater headroom. It can survive for longer at a lower oil price,” he said.

Mr Griffith said that Shell was also likely to reveal details of cost-cutting plans at today’s briefing, including staff cuts and savings on materials. The spreading global recession has led to a drop in costs – everything from the cost of renting rigs to buying steel beams and other engineering equipment.

— BG moved closer to buying Pure Energy Resources, the Australian coal seam gas producer, for A$1.03 billion (£485 million) after Arrow Energy let its offer lapse.

Arrow said that it would not proceed with the compulsory acquisition of the shares it does not own in Pure, after its cash and stock offer lapsed on Friday. Arrow had built up a stake of 20.31 per cent in Pure, though it already owned 19.9 per cent of Pure through a pre-initial public offering investment.

BG raised its cash offer for Pure last month to A$8.25 per share, if it received 90 per cent shareholder acceptance for its offer.

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