Royal Dutch Shell acts to reinforce business resilience and financial strength

Ben van Beurden, Chief Executive Officer of Royal Dutch Shell said: “As well as protecting our staff and customers in this difficult time, we are also taking immediate steps to ensure the financial strength and resilience of our business. The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past.

“In these very tough conditions, I am very proud of our staff and contractors across the world for maintaining their focus on safe and reliable operations while also ensuring their own health and welfare and that of their families, communities and our customers.”

In order to deliver sustainable cash flow generation, Shell is actively managing all operational and financial levers – from focusing on maintaining safe and reliable operations each day to reducing capital spend and operating expenses.

Today, they have announced that they have embarked on a series of operational and financial initiatives that are expected to result in the reduction of underlying operating costs by $3-4bn per annum compared to 2019 levels, and also a reduction of cash capital expenditure to $20bn.

Together, these initiatives are expected to contribute $8-9bn of free cash flow on a pre-tax basis. Shell is still committed to its divestment programme of more than $10bn of assets in 2019-20 but timing depends on market conditions.

The shares fell 3.2% in early trading.

Market reaction

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown

We’re not surprised Shell has opted to slash costs and capital spending – it’s very much in line with the 2015/16 playbook and reflects a desire to protect cash and ultimately the dividend. If the current oil price decline proves temporary then Shell will be rewarded for sticking to its totemic dividend policy.

However some shareholder returns have already proven less than sacrosanct, with the share buyback suspended. If we’re in a new era of sustained sub-$40 oil then the dividend could yet become a burden that’s too much to bare.

That’s the rub for Shell investors. The group’s taking emergency action to protect cash flow in the short term, but the influence of the oil price means its future is largely out of its hands. There’s no knowing exactly how long the toxic combination of increased global supply and falling demand will last.