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Shell’s dividend gusher can survive a prolonged siege

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If the oil price stays low, Shell’s van Beurden may have to eat his words Photo: AFP

Sunday Telegraph: Jeremy Warner: 20 Sep 2015

Ben van Beurden, chief executive of Royal Dutch Shell, is on a charm offensive to convince investors – and the press – that both the dividend is safe and the pending £45bn takeover of BG Group will proceed as planned. These promises attempt to address what is in essence the same underlying worry – the low oil price and its prospects for recovery.

In each case, the markets are plainly sceptical. Shares in Shell are on a barely believable yield of more than 7 per cent, indicating a high probability of a dividend cut to come, while BG shares trade on a discount of more than 10 per cent to the see through value of Shell’s offer.

If the deal goes through, BG shares therefore offer the mouth watering prospect of a 9 per cent yield. Either Mr van Beurden will have to eat his words, or both companies have been profoundly mispriced. Regulatory hiccups cast further doubt on the BG deal.

The Shell deal looms over BG’s staff

Is the Shell CEO on firm ground? There are few companies as financially robust as Shell. Unlike many of the mining finance houses hit hard by the collapse in commodity prices, it is relatively lightly geared, with net debt of less than 13 per cent of equity. What’s more, the money it saved on cutting back on capital spending last year was alone virtually enough to cover the entire cost of the dividend.

Shell certainly has the capacity to withstand a prolonged siege of sub-$50 a barrel oil prices, and keep paying the dividend regardless. In this sense, it is probably better placed than any of the other oil majors, all of which are on similar yields. If it does eventually cave, it will almost certainly be the last to do so.

Yet there is also only so far you can slash spending to finance the dividend before the company deprives itself of a long term future, and the dividend has to be chopped any way. Gearing looks low, but it would become unbearably high if the “stranded assets” brigade get their way, and for environmental reasons, big fossil fuel producers were forced to leave it in the ground. A consistently low oil price would have much the same effect, making it uneconomic to develop some proven reserves.

Think back to Lloyds Bank, which for years paid a dividend many believed to be unaffordable. If nothing else, Lloyds proved that the unsustainable can be sustained an awfully long time before it stops.

Then along came the banking crisis, and the rest is history. The dividend was indeed unsustainable. Pension funds can only pray that Shell is different, for as things stand, it accounts for more than 8 per cent of all dividends paid in the UK. Shell is the dividend gusher we can ill afford to lose.

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