Monday 23 March 2020 12:42 pm

Shell and Total slash costs and suspend buybacks amid oil price slump

Oil giants Shell and Total have suspended their share buyback programmes and announced billions of dollars of cost cutting as they try to weather the recent crash in oil prices. 

The price of Brent crude slumped to a 17-year low last week as the coronavirus pandemic has cut global demand for oil and a price war between top producers Saudi Arabia and Russia further depressed prices.  

Read more: Oil prices rally above $30 – but fail to hold onto gains

Shell this morning said it had “embarked on a series of operational and financial initiatives” to increase free cash flow, including cutting capital expenditure for 2020 by $5bn (£4.3bn) and suspending the next tranche of its share buyback plan. 

The company said it would reduce 2020 cash capital expenditure to $20bn or below from a planned level of around $25bn, adding that the initiatives would contribute $8bn to $9bn free cash flow on a pre-tax basis.

Shell also said underlying operating costs will be cut by $3bn to $4bn per year over the next 12 months compared to 2019 levels. 

“We will continue to review the dynamically evolving business environment and are prepared to take further strategic decisions and consider changes to the overall financial framework as necessary,” the company said. 

Read more: Morrisons cuts fuel prices as oil prices dip lower

French oil major Total announced this morning that it would slash capital spending by around 20 per cent to less than $20bn. 

In a video message to company staff, chief executive Patrick Pouyanne said Total was facing three crises: the coronavirus outbreak, the crash in oil prices due to a sharp fall in global oil demand just as supply is expected to rise, and the climate change crisis.

With oil prices now below $30 per barrel, Total is facing a cash shortfall of $9bn compared to where it would stand with oil at $60 per barrel. 

“In the face of this crisis, we need to react,” Pouyanne said. “We have a $9bn hole and we want to plug it. To reduce it, we will act with the various levers that we have.”

He said the group would aim to cut a further $500m costs compared to 2019 levels and suspend its share buyback programme, which had a further $1.45bn to run this year. 

Norwegian state-owned oil major Equinor and Italy’s Eni have already scrapped their share buyback programmes and announced plans to re-evaluate spending. US oil giant Chevon is also weighing up ways to cut spending.

Total’s shares rose over eight per cent in London following the announcement. 

Shell’s B shares fell as much as four per cent in early trading but recovered to stand almost two per cent up by lunchtime. 

Hargreaves Lansdown analyst Nicholas Hyett said Shell’s move to slash costs and spending was unsurprising, and reflected the company’s desire “to protect cash and ultimately the dividend”.

Read more: Shell’s final quarter profit halves amid oil price slump

“If the current oil price decline proves temporary then Shell will be rewarded for sticking to its totemic dividend policy,” he continued, but cautioned that if we have entered a new era of a dramatically lower oil price, “the dividend could yet become a burden that’s too much to bear”.

“The group’s taking emergency action to protect cash flow in the short term, but the influence of the oil price means its future is largely out of its hands,” Hyett added. “There’s no knowing exactly how long the toxic combination of increased global supply and falling demand will last.”