Royal Dutch Shell is under pressure to repay its investors’ patience this week by beginning a bumper $25bn (£19bn) share buy-back plan. The oil giant issued shares to existing investors instead of paying out dividends when oil prices were low as it sought to hang on to cash.
As the crude market has recovered, Royal Dutch Shell has so far prioritised debt reduction over repurchasing the dividend scrips. But expectations are high that its quarterly report on Thursday could signal the start of buy-backs. Jon Rigby, an analyst at UBS, said the forthcoming results season “may be the quarter that sees a significant shift into share buy-back mode”.
“We believe there is a strong chance but not a certainty that [it] will announce the commencement of its share buy-back with the 2Q results,” he said. A rally in the oil market last year boosted Royal Dutch Shell’s cash flows enough to restart full dividend payouts for shareholders. But in February, the oil giant dashed investor hopes that it would begin buying back the shares it issued in lieu of dividends during the downturn.
Jessica Uhl, the group’s chief financial officer, said Royal Dutch Shell would begin the mammoth task of buying back $25bn worth of scrip payments before the end of the decade, once a $30bn asset sale programme has made a dent in the company’s $88bn debt pile and rising oil prices have boosted cash flow. Shell has been rapidly pruning its portfolio of assets in recent months.
Just last month, it sold its 45pc stake in the Draugen Norwegian offshore field as part of a $566m deal and offloaded a 15pc stake in a Malaysian gas venture for $750m. “The key appears to be consistency,” said Lydia Rainforth, of Barclays, “in that once the [buy-back] programme starts, it wants to be able continue in any reasonable oil price environment. “The signal of starting a buy-back, however small at the initial stages, would be welcome though,” she added. Gordon Gray, of HSBC, said Royal Dutch Shell is one of the major oil companies that “look closer to restarting buy-backs than most” and could announce investor windfall as soon as next week.
In the last two months alone, the group has sold off oil and gas assets in Norway, Malaysia and Thailand in a series of deals worth over $2bn in total. The sales bring Royal Dutch Shell to within a breath of its $30bn target for the end of the year. But it may not be enough to cut its debt pile down to its target gearing before beginning the buy-backs, Mr Gray warned.
“Royal Dutch Shell’s management have repeatedly talked of wanting ‘line of sight’ to their target gearing level of 20pc before restarting buy-backs. We don’t see gearing there yet – our end-2Q figure is 23.5pc – but with a target to buy back $25bn of stock by 2020, timing is getting fairly limited,” he said.
Royal Dutch Shell may none the less choose to announce the restart of buy-backs against a backdrop of strong oil market prices, he said. “Market expectations of [buy-backs] happening seem to be rising, so there could be room for disappointment if it doesn’t,” he added. The group may also be on the cusp of selling two Nigerian oil licences in an area hard-hit by environmental and human rights controversies for $2bn, according to reports from Bloomberg. The news agency cites sources close to the deal who have said the licences will be sold to company run by Nigerian tycoon Tony Elumelu. Yahoo Business