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Shell struggles to keep lavish divis gushing

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Danny Fortson: October 16, 2016

Something, at some point, has to give at Shell.

Chief executive Ben van Beurden made an epic bet last year when he agreed to pay £35bn to take over rival BG. The deal, struck in the midst of an oil and natural gas price downturn, was predicated on a recovery that has yet to materialise.

The longer the price slump goes on, the greater the strain on Shell’s balance sheet. And the harder it will be to make good on van Beurden’s pledge to sell $30bn (£24.6bn) of assets by 2018 to offset the cost of BG.

The stock has roared back this year and closed on Friday at £20.84, up one-third from January, when crude dipped below $35 a barrel. Brent ended the week at about $52, which explains most of Shell’s recovery.

But trouble is brewing.

Shell is the world’s biggest dividend payer, showering shareholders with $15bn a year, for a yield of more than 6%. It can’t afford it.

Cash flow covers only about half of what it needs to fund the dividend plus operational and exploration spending.

The FTSE lOO giant is borrowing billions to keep investors sweet while it waits for an oil price bounce and new projects to bring relief. Yet the big ones will not come on stream until 2018.

Which brings us back to van Beurden’s great car boot sale. Final bids went in last week for a handful of North Sea assets, but their estimated $2bn price tag gets Shell only so far. Ditto similar sales in Ireland, the Philippines and Gabon, all in the sub-$Ibn price range.

One idea doing the rounds is Shell getting rid of its entire Canadian business, which includes big tar-sands operations. That would make a difference, bringing in at least $10bn.

Van Beurden has said repeatedly the divestment programme will be value­ rather than time-driven, yet Shell is short of time.

The oil price is stuck despite Saudi Arabia’s recent pledge to cut output. Swallowing BG made Shell the biggest player in natural gas, which is mired in an even more intractable rut.

Buy Shell for the divi, but it may not last.

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