After promising to provide shareholders with three-quarters of the earnings from the sale of Permian shale oil reserves to ConocoPhillips, Royal Dutch Shell Plc shareholders will receive an unexpected $7 billion payout.
The cash pledge comes less than two months after Shell increased its dividend by nearly 40% and began a $2 billion share repurchase program. It’s another sign that the energy behemoth is trying hard to reclaim investor confidence after announcing an unprecedented cut to its dividend distribution last year during the height of the Covid-19 outbreak.
“A disposal immediately allocated into a $7 billion repurchase, with balance sheet strengthening on top, is rare for investors elsewhere,” Bernstein Research analysts wrote in a note. It “proves without a shadow of a doubt that Shell is committed to regaining shareholder trust.”
By 11:19 a.m. in London, Shell’s Class B shares had risen 4.3 per cent to 1,492 pence.
Shell will use $2.5 billion of the $9.5 billion it will get from the Permian sale on Monday to pay down debt. The rest, Wael Sawan, Shell’s upstream director, said in an interview after the agreement was revealed on Monday, “the base case is for that to go as share buybacks.”
The company’s board of directors will make the ultimate decision, which is expected to be made in the fourth quarter when the transaction fully closes, he said. Shell said in a statement that the $7 billion distribution will be in addition to the company’s previous goal to distribute 20 per cent to 30 per cent of cash flow from operations to investors.
Returns to Shareholders
Following years of expansion, the world’s biggest oil producers and US shale explorers have increasingly prioritized shareholder returns overgrowth. Oil prices, which are approaching their highest in three years, have supplied them with plenty of funds to do so.
“Having the ability to transact with a strong, robust oil price relative to where it has been in recent years, and in a market that is currently hotly consolidating, is a sensible opportunity for us to seize,” Sawan added. According to him, the deal provides Shell with the equivalent of more than a decade’s worth of cash flow from Permian assets.
According to a statement released Monday, the contract will provide ConocoPhillips with increased daily production of around 200,000 barrels of oil equivalent in 2022. As a result, the Houston-based firm will become one of Permian’s largest producers.
However, under Shell’s hands, the Permian activities were “sub-scale,” according to Sawan. “You need scale to properly unlock the full potential of an asset like this.”
Shell’s withdrawal from the Permian comes as the Anglo-Dutch conglomerate restructures its strategy to focus on less carbon-intensive fuels while aiming towards net-zero emissions. After losing a dispute against an arm of Friends of the Earth, Shell was ordered by a Dutch court in May to cut emissions harder and quicker than expected.