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Shell, BP share buybacks signal recovery after oil price slump

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Shell, BP share buybacks signal recovery after oil price slump

Indicative of the turning tides in oil prices and its balance sheet, Royal Dutch Shell plc will restart its share buyback program, as the company hiked its forecast for cash generation.

"We have increased our outlook for organic free cash flow, which has been consistently strong over the past five quarters. We have also made significant progress with our divestment programme, allowing us to reduce net debt in that time. Meanwhile, we intend to cancel our scrip dividend programme with effect from the fourth quarter 2017," Shell CEO Ben van Beurden said during a strategy update issued Nov. 28.

In 2015, Shell introduced a scrip dividend, which gives shareholders the option to be paid in either shares or cash, as the company faced sliding oil prices and moved to acquire BG Group Plc through a combination of cash and stock. Its fourth quarter interim dividend, to be announced on Feb. 1, 2018, will be entirely in cash.

The company reiterated plans to buy back $25 billion of shares between 2017 and 2020.

Shell also raised its outlook for annual organic free cash flow from $25 billion to $30 billion by 2020, assuming a Brent crude oil price of $60 per barrel. The company expects new projects to generate $10 billion of cash flow from operations by 2018.

Against a backdrop of weak global oil prices since 2014, Shell reported a sharp increase in earnings and solid cash flow in the third quarter of 2017.

Shell's cash flow from operations during the three-month period totaled $7.6 billion, up an impressive 148% from the same quarter in 2016, as recently acquired assets in Brazil and Australia started to generate cash.

Improved refining, stronger realized oil and natural gas prices, and higher hydrocarbon production from new fields offset the impact of field declines and divestments to push the company's profit attributable to shareholders, excluding special items, to $4.1 billion in the third quarter. This was up 47% on the year.

While a recovery in oil prices has helped improve the company's financial position, a key part of Shell's strategy to reduce debt and generate cash flow lies in its divestiture plan. The company is on track to sell-off assets worth a total of $30 billion over a two-year period. According to the company, its $30 billion divestment program between 2016 and 2018 is almost completed, with deals worth $23 billion finished, $2 billion announced, and $5 billion in advanced progress. Once this program is completed, Shell expects to continue divestments at an average rate of more than $5 billion until at least 2020.

During early afternoon trading Tuesday, Shell's stock was up $2.08, or 3.36%, on the day to $63.93 per share on the New York Stock Exchange.

In recent weeks, several other oil and gas majors indicated that they too will end their respective scrip programs following several years of sagging oil prices. At the end of October, officials from Norway's Statoil ASA announced the company would conclude its scrip program in the fourth quarter and beyond.

Similarly, amid production growth and stronger commodity prices that goosed third-quarter earnings higher, BP Plc said it would end its scrip program and restart a share buyback program as the company recovers from slumping oil prices and the 2010 oil spill at the Deepwater Horizon in the Gulf of Mexico.

BP's scrip dividend program was put in place in 2010 as an alternative to the cash dividend. On average, the election uptake has been around 20%, which has provided some financial flexibility after oil prices tumbled.