Royal Dutch Shell and Total suspended their share buyback programmes and announced billions of dollars in capital and operational spending cuts as the energy majors seek to buffer themselves against oil market turmoil.
The coronavirus pandemic that has hit the global economy has curtailed demand for oil, while a price war led by Saudi Arabia has depressed prices further, taking Brent crude last week to a 17-year low.
Shell said on Monday it was taking steps to ensure its “financial strength and resilience”.
The Anglo-Dutch group will not continue with the next tranche of its share buyback programme. It said it still intended to repurchase $25bn of shares but would miss its year-end completion target.
The company said it would also cut capital expenditure to $20bn or less this year, from initial plans for $25bn in 2020, while reducing operating costs by $3-4bn versus levels from last year.
Along with “material reductions” in working capital, Shell said this would contribute $8bn-$9bn of free cash flow on a pre-tax basis. However, this will not be enough to make up for the drop in oil prices since January.
The company said its dividend policy, for now, would remain in place as would its plans to sell at least $10bn of assets. But it said the timing of these divestments would depend on “market conditions”.
“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,” said Ben van Beurden, chief executive.
Patrick Pouyanné, Total’s chief executive, said on Monday it, too, would cut capital spending by about 20 per cent to less than $15bn. The French group will also aim for another $500m in cost savings versus 2019 and suspend its share buyback programme, which had $1.45bn left to run this year.
With oil prices now below $30 per barrel, Total faces a cash gap of $9bn compared with the situation it would have been in with oil at $60 per barrel. The group’s current pre-dividend break-even, the point at which it can finance its current investments, is less than $25 per barrel.
In a video to Total’s staff, Mr Pouyanné addressed the fact that the $5bn in cost savings would fall well short of the $9bn needed.
“We’ll be using our solid balance sheet of low levels of debt,” he said. “Hence our decision to deleverage so we could react to such volatility in oil prices. We will be able to borrow $4bn, for debt gearing of 2 per cent, so no worries on that score.”
Norway’s Equinor and Italy’s Eni said last week that they would scrap their share buyback programmes for this year while re-evaluating spending plans.
UK rival BP has said it plans to reduce capital and operational spending. In the US, Chevron said it aimed to cut expenditure and lower oil output in the short term, while ExxonMobil said it would make “significant” spending cuts.