The income part of my portfolio has been taking a hit this last month or so, there’s no getting around it. While I feel that share price declines because of Covid-19 are for the most part likely to bounce back, income is always less certain. So I was disappointed when at the end of last month Royal Dutch Shell (LSE: RDSB) said it would be cutting its dividend for the first time since the Second World War.
Not a short-term measure
The cut to the dividend of two-thirds came, of course, as oil and energy prices collapsed on the back of coronavirus and overcapacity. If this was the only problem, and I thought the reduced dividend would be short lived, I wouldn’t have too much concern. However Shell has indicated otherwise.
CEO Ben van Beurden has said that the reduction is in fact part of a “reset” of the company’s dividend policy. Not what we investors wanted to hear. What’s more, Beurden said this was just the early part of a “fundamental shift for Shell over the next 30 years”.
One thing I have always liked about Shell as an investment is the company’s adaptability. Specifically, they have been fairly adamant about the need to adapt as the world moves away from oil and fossil fuels and towards renewable energy sources.
I am of the opinion that a real, practical shift is a long way off yet, but perhaps we are witnessing the first fundamental shift in policy for an oil major.
Oil prices
That said, crude oil is of course, still Shell’s main business, and that won’t be changing anytime soon. Low oil and gas prices then, are what we really need to consider.
Beurden has warned “We do not expect a recovery in oil prices or demand for our products in the medium term”, and the International Energy Agency has said worldwide energy consumption could fall 6% this year.
Despite this however, I can’t help but feel there is a slight hint of panic in the air with regards to crude prices. As always, greed and fear drive prices far more than fundamentals, and I think the true weakness in the oil price market triggered a knock-on panic, particularly with paper sales (futures contracts on exchanges rather than physical crude oil itself).
OPEC is due to meet at the start of June to consider ways of “stabilising the world oil market” – a phrase that usually hints at production cuts from its members.
That said, things are fast becoming too uncertain for me in the oil market, at least in terms of fresh investments. I am certainly holding on to the oil stock I have, but I am curious to see how the next few months pan out before I put any more money in this sector.
