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Shell's CEO explains why the oil giant had to slash its dividend for the first time since World War II — and why it will help keep the company's low-carbon goals on track

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  • Royal Dutch Shell cut its dividend for the first time since World War II on Thursday, citing "unprecedented and intense economic headwinds." 
  • The supermajor's CEO Ben Van Beurden says destruction of fuel demand, which sent oil prices sinking, "will go very, very deep in the coming weeks and months."
  • Cutting the dividend will help the company navigate this "crisis of uncertainty" and free up cash to keep the company on track to reach its clean-energy targets.
  • Shell said it would become a net-zero emissions company by 2050 or sooner. 
  • Visit Business Insider's homepage for more stories.

In a move that sent tremors through the oil and gas industry, Europe's largest energy company and supermajor, Royal Dutch Shell, cut its dividend for the first time since World War II. 

"Considering the risks of a prolonged period of economic uncertainty, including the weaker demand in our products, lower and the less stable commodity prices, we do not consider that maintaining current level of shareholder distributions is in the best interest of the company and its shareholders," Shell's CEO, Ben Van Beurden, said in a call with investors on Thursday. 

Following in the footsteps of Norway's Equinor, which cut its dividends earlier this month, Shell plans to reduce its payments per share by about two thirds for the first quarter of 2020. 

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'Crisis of uncertainty'

In a matter of weeks, the coronavirus pandemic all but evaporated global demand for oil, which is down about 30% this month, according to the International Energy Agency. 

In fact, there's so much oil in the market today that storage is running out.

The oil glut has sent the price of Brent crude, the international benchmark, down to 20-year lows. And when oil is that cheap, exploration and extraction become unprofitable.

That's bad news for a company like Shell, which has both upstream and downstream activities.

Making matters worse, there's hardly any demand for the company's downstream products like gasoline, so even as the price of oil recovers, the company's success will still largely depend on a demand rebound. 

While some states and cities are opening up after locking down to halt the spread of the coronavirus, no one knows exactly when demand will rebound. That's Van Beurden calls "the crisis of uncertainty." 

"We are looking at a major demand destruction," he told investors. "We don't even know that will come back. So the oil price may come back, but if the volumes are significantly lower, we still have a major dislocation."

Shell International

What it takes to stay afloat 

Shell doesn't expect a recovery in oil prices or demand even in the medium term, Van Beurden said. That's why the company — like every other major — has taken somewhat drastic measures to cut costs. 

In late March, the company announced that it was shaving $5 billion off of its investment budget, in addition to a $3 billion to $4 billion cut from its operating budget. 

Capex and opex cuts are more or less to be expected in a downturn. The company's dividend cut is more surprising, as dividends are magnets for energy investors. 

Read more: Layoffs, dividend cuts, and budget reductions: We're tracking how 18 oil giants from Shell to Exxon are responding to the historic oil price meltdown

Ultimately, the move was about freeing up cash. By dropping the payment per share from $0.16 to $0.47 for the first quarter of 2020, Shell will save about $10 billion, CNN reports

"Had we not reset a dividend and had we resorted to just more capex and opex cuts to somehow keep this going and continue to borrow money to do so, which I think would be highly irresponsible, we would have had zero room to maneuver until we were at the brink and then we had to maneuver nevertheless," Van Beurden said. 

Shell hydrogen

How to maneuver into a new energy economy

The money Shell saves from its recent decisions will help the company maintain its existing operations, and will also provide the company with flexibility as it attempts to navigate a new energy economy. 

Earlier this month, the company announced that it's doubling down on its pledge to reduce carbon emissions. By 2050 or sooner, it plans to be a net-zero carbon emissions company. 

"We are talking here about a fundamental shift for Shell over the next 30 years," Van Beurden said. "We are looking to ensure that we can meet our ambitions from a [net-zero emissions] standpoint and position our portfolio for the energy transition, and we're ensuring by the choices that we're making, to have the capital and flexibility to do so.

Though analysts project that solar and wind installations will be down this year, Van Beurden believes that the energy transition is still well underway and that it could even accelerate in the "recovery phase of the crisis," Reuters reports.  

"We want to be well-positioned for it," he said. 

Plus, the financial return on oil investments has become increasingly uncertain.

Whereas historically, oil and gas exploration and production have yielded strong returns, those activities are now economically much weaker — not just because the price of oil has tumbled, but because renewable energy sources are cheaper than ever. 

In fact, on the call, Van Beurden said he doesn't subscribe to "the whole idea that upstream projects, by definition, are very attractive and projects in the new energy space are very unattractive." 

Shell's activities that fit within the energy transition can yield strong returns, he said, not to mention they will likely build investor support in the long run. 

"Companies growing low-carbon businesses should eventually be rewarded by the market," Barclays analysts said in a note. "Ultimately we see this as the most likely way for Shell to rebuild its ambition to be a world-class investment case over the longer term." 

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