Hats off to the board of Royal Dutch Shell Plc for letting reality rather than hope determine the oil major’s dividend. Thursday’s historic and hefty cut to the payout recognizes that the pandemic is likely to change the dynamics of energy demand for some time. The hope now must be that Shell resists any pressure to reverse the reduction in a hurry. Instead, it should use the breathing space to reset more fundamentally how it allocates financial resources to investment, debt reduction and paying out to shareholders.

The 66% drop in the quarterly dividend is momentous. High dividends have made Shell, along with London-listed peer BP Plc, a favorite among income funds and retail investors — a constituency the move is bound to upset. Shell pulled every lever to maintain the payout when the oil price collapsed in 2014; investors expected more of the same this time. The stock was down as much as 8% in early trading on Thursday, having already fallen by more than a third this year.

Shell actually performed well in the first three months of 2020, partly because the impact of the pandemic and a Saudi Arabia-led price war in the oil market hit late on. Operating cash flow, stripping out some helpful working-capital effects, was $7.4 billion, compared with $12 billion in the fourth quarter. Divestment proceeds helped fund capital expenditure, so the company’s net investment needs used up only $2.7 billion of cash. That meant the existing $3.5 dividend bill looked affordable. Shell even cut net debt both absolutely and as a proportion of its total capital, a keenly watched leverage measure known as gearing.

But it would have been foolish to extrapolate from the first quarter. Cash generation this year remains difficult to predict. Asset disposals will be harder to do. The company is taking similar action to BP by cutting capital spending and operating costs, but this can only go so far. The difference is that Shell, unlike BP, is unwilling to maintain the dividend by letting debt rise and crossing its fingers for a recovery.

Indeed, Shell is still saying it would like its gearing to be below 25%. The measure was 29% at the end of March, against 36% at BP. With the dividend now costing only about $1.2 billion per quarter, the company is at least trying to live within its means and fund the payout from operations without relying on asset sales or borrowing.

What if the economy picks up next year? The pressure will be on Shell to revert to being the high-dividend stock it once was.

But there’s a chance now to change the Anglo-Dutch oil giant into a permanently less indebted company, making more use of share buybacks to return excess cash to investors. That might be rewarded by the stock trading on a higher multiple of earnings, if the historic relative valuation of the less highly geared U.S. oil majors is anything to go by. Shell would also have more resources to invest in the energy transition, ideally accelerating its existing plan to become a net-zero emitter by 2050.

Investors are upset today, but Shell’s dividends have always been discretionary — like those of its peers. If that discretion isn’t used now, it never will be.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

For more articles like this, please visit us at bloomberg.com/opinion

©2020 Bloomberg L.P.