Can OPEC save BP plc and Royal Dutch Shell plc?

Does OPEC need to take action to save dividends at BP plc (LON: BP) and Royal Dutch Shell plc (LON: RDSB)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Oil majors must long for the halcyon days when a sustained period of low crude prices could be expected to send OPEC riding to the rescue with sweeping production cuts and a promise to boost global prices. Now, two years into a global supply glut that shows few signs of lifting, do oil majors need an OPEC to finally take action?

BP (LSE: BP) wouldn’t say no to the help. Interim results released last month saw underlying replacement cost profits, its preferred metric of profitability, slump 67% year-on-year. Add in a $2bn statutory loss for the period and net debt leaping to $30.9bn and worries have rightly begun to proliferate that dividends will be slashed sooner rather than later.

Unsurprisingly, management has publicly maintained that there’s little risk to shareholder returns. The company says that it can balance capital expenditure, operating costs and shareholder returns with crude in the $50-$55/bbl range.

The good news is that prices aren’t far off this mark, with Brent crude currently trading at around $47/bbl. And the company’s gearing ratio at 24.7% is within the safe range of 20%-30%, although it’s rising quickly.

However, in a worst case scenario where prices remain at current levels for a sustained period of time, the company would need to lower the $2.2bn it returned to shareholders over the past six months alone. If management is to be relieved of making this tough decision, oil prices will need to rise, whether that comes from OPEC, other major suppliers or a miraculous jump in global demand.

Betting on gas

While BP has been treading water for five years by selling assets and slashing capex to pay out over $43bn for costs related to the 2010 Gulf of Mexico spill, rivals such as Shell (LSE: RDSB) have been planning for a future where OPEC has less sway and prices remain far below $100/bbl.

Shell believes the decades to come will mark the rise of natural gas as a cleaner, cheaper fossil fuel. To this end it took advantage of slumping valuations across the industry last year to snap up rival BG for £35bn. This acquisition, while pricey, has made the combined group the world’s largest supplier of liquefied natural gas (LNG).

Although LNG prices have been battered as badly as crude oil prices, the deal shows that Shell’s management is taking seriously the prospect of a future where oil is no longer the cash cow it has long been.

In the short term though, the BG deal and low fuel prices have presented Shell’s management with the same dilemma their counterparts at BP face. Gearing at the end of June had risen to a dangerously high 28.1% on the back of lower earnings and the BG acquisition, while dividend payouts remained untouched.

In the past quarter alone these shareholder returns totalled a whopping $3.7bn, a large expense for Shell when constant cost of supplies earnings collapsed 87% to $1bn over the same period year-on-year.

With dividends on the line, both BP and Shell will be watching closely next month’s informal OPEC meeting in Algeria. Of course, with American shale producers and lower global demand. even an OPEC cut may not be enough to send prices soaring. The oil majors will muddle through either way thanks to strong downstream assets and price cuts, but investors shouldn’t expect dividends to be sacrosanct forever.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

GSK shares plummet 15% in a week! What’s going on here?

GSK shares had a bad time last week. They're down 15% as investors' sentiment soured ahead of litigation proceedings in…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Stock market recovery: have all the bubbles now burst?

Asset bubbles keep on coming, and here's what I'm doing to navigate through them and invest for the stock market…

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

How I’d invest £290 a month in UK shares for a passive income that beats the State Pension

UK shares can offer a lucrative path for passive income. Our writer considers a plan to double his State Pension.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

3 of the best shares to buy now with £2,000

I reckon the best shares to buy now have strong growth in earnings and recent good news flow, such as…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m aiming for £500 a month in income from dividend stocks 

Here's my three-step plan for achieving a growing income from dividend stocks and three companies I'd use to help execute…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

UK shares are cheap! So why is Warren Buffett ignoring them and should you too?

Many British shares are trading cheaply and pay dividends. This is normally the hunting ground for Warren Buffett, yet he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’ve increased my passive income by 600%

Finding the right opportunities can bring spectacular results. Here’s how our author has managed to increase his monthly passive income…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Could lithium shares make my Stocks and Shares ISA a goldmine?

Our writer is considering buying lithium shares for his Stocks and Shares ISA. Here, he outlines the decision process he…

Read more »