Will Shell’s quarterly dividend be in doubt after it takes huge losses from the decision to end its controversial drilling campaign in the Arctic after failing to find oil, apart from some weak shows?
The oil and gas giant said on Monday that it would cease further exploration activity in offshore Alaska “for the foreseeable future,” partly due to the high costs of exploring in the region as well as “the challenging and unpredictable federal regulatory environment in offshore Alaska”.
The future of Shell’s dividend was brought into focus yesterday when Vale, the big Brazilian miner, proposed what amounts to a 25% cut in its dividend for 2015.
Shell’s decision to abandon Arctic drilling came just six weeks after the US government gave the company final clearance for its campaign.
The decision is likely to cost the oil giant more than $US4 billion in charges and write-offs against the third quarter result. In fact some analysts say the charges could be as high as $US7 billion.
Seeing Shell earned $US3.4 billion in the second quarter, it is likely the Arctic related write-offs will produce a bottom line loss for the quarter when the results are announced on October 29.
Shell paid an unchanged second quarter dividend of 47 cents a share after earning fell sharply because of a plunge in oil prices in the past year. In fact quarterly earnings fell 40% after a 56% slide in the first quarter.
The plunge in oil prices since June last year, from more than $US115 a barrel to less than $US50 now, has seen dozens of high cost projects around the world abandoned or postponed by oil and gas companies large and small.
The Burger prospect is in an area that has been estimated by the US as potentially holding 4.3 billion barrels of recoverable oil. But so far that estimate has not been backed by the evidence and Shell isn’t interested in spending billions more to drill a second and third exploration well.
Shell said it expected to take financial charges as a result, which it would disclose during its third quarter results. In fact some estimates put the costs of its total Arctic campaign since 2007 at a massive $US7 billion.
But analysts at Deutsche Bank in New York estimate that Shell’s Arctic exploration project could cost the company about $US9 billion. In a note reported by Reuters, they said, “The entire episode has been a very costly error for the company both financially and reputationally”.
Shell will likely announce another round of spending and job cuts, to go with those already announced in the past year, to help pay for the cost of the losses from the abortive foray into the Arctic. Big resource companies are cutting spending and costs heavily to protect the level of dividend payments.
Total last week pledged to preserve its dividend payouts after it announced billions of dollars more in spending cuts and project delays to meet what it warned would be a prolonged decline in oil prices.
Total CEO Patrick Pouyanné told investors and analysts that spending on oil and gas projects would be cut by another 15% next year to around $US20 billion, and by a further $US3 billion in 2017. That means spending cuts now total 40% compared with the level of investment in 2013.
Total also confirmed it was not considering giving the green light to any new projects, and three projects under development have been slowed. The start-up dates for Ichthys in Australia (offshore Darwin), Martin Linge in Norway and Tempa Rossa in Italy — have been pushed back past 2017.
Total said these delays, combined with the spending cuts, will lead to a sharp slowdown in oil and gas production in 2017 to 2.6 million barrels a day from the previous 2.8 million barrels a day.
And overnight Vale, the big Brazilian miner (especially iron ore and nickel) surprised by revealing a 50% cut in its latest half year dividend (or 25% over a full year) dividend to $US1.5 billion from the $US2 billion promised earlier in the year. Seeing $US1 billion has been paid out, another $US500 million will be paid at the end of October, once the move has been approved by the full board. No mention was made of dividend policy for 2016.
That means that of the world’s leading mining companies, only BHP Billiton and Rio Tinto have managed to maintain their ‘progressive’ dividends (higher dividends). That has been done by deep cost and project cuts, job losses and reductions in investment.
