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Shell Should Resist Dividend Siren Calls

APRIL 29, 2011


Royal Dutch Shell‘s bump in the road has sure flattened out.

The oil company’s first-quarter earnings were up 53% on a disappointing last quarter of 2010, thanks to high oil prices and improved liquefied-natural-gas sales in Asia and Europe. Stronger cash flow may have some investors pressing for higher dividends. Shell should resist, for now.

Like BP, which reported on Wednesday, Shell has been shedding unwanted assets, leading to output shortfalls. Its production fell 3% year on year. But, also like BP, Shell’s results were boosted by higher downstream profits, which doubled year on year thanks to sharply wider refining margins.

But Shell is in much better shape than its British rival. It is selling assets by choice rather than necessity, to improve overall efficiency. Shell’s return on average capital employed improved in the first quarter to 12.9% against 11.5% in 2010. Shell expects production to be flat year on year in 2011 before rising 6% in 2012, with major projects such as its liquefied-natural-gas operations in Qatar coming on stream.

The better performance might appear to leave room for higher dividends. Operating cash flow of $8.6 billion in the first quarter amply covered $4.1 billion of capital spending and $1.6 billion of dividend payouts, while Shell’s debt-to-equity ratio fell to 14%.

Still, Shell should remain cautious until it is clear either that its output-raising plans are firmly on track or that elevated oil prices are here to stay. Based on its increased production outlook, the company is targeting $43 billion of cash flow in 2012 based on average oil prices at $80 a barrel. Right now, even with oil prices already averaging $87 a barrel in the last 12 months, Shell is short of that target: It generated $36 billion of cash flow over that period. There is room to return more to shareholders when investment needs allow. Shell paid out 29% of operating cash flow over the past four quarters compared with Exxon Mobil’s 42%.

Investors wanting to share more of Shell’s good fortune will have to be a bit more patient.

Write to Andrew Peaple at


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