Oil major Royal Dutch Shell PLC's dividend cut could prompt other European integrated oil and gas companies to do the same, but trimming payouts to investors should be used as a last resort after employing other cost-cutting options in the face of the oil price crash, according to analysts from Goldman Sachs.

"We believe that it is in the best interest of shareholders if Big Oils continue to rethink the capital intensity of their businesses, rather than reducing shareholder distributions," the investment bank said in a May 1 research note.

Historically, oil companies have opted to protect the dividend in times of financial distress, focusing instead on capital discipline and operating efficiencies as a way to preserve capital. To address the recent crash in oil prices, Shell and its peers all announced spending cuts, operating expense reductions, and the suspension of stock buyback programs.

While balance sheets at the largest European oil companies are still tight, they are resilient, with gearing within the historical range for the group, Goldman Sachs said. However, other analysts have indicated that it will be difficult for companies such as London-based BP PLC to sustain the dividend in future quarters without tacking on more debt, particularly once the full effect of the oil market collapse takes root over the next few months.

Although its debt has risen to the highest level in several years following the economic fallout and demand destruction caused by the coronavirus epidemic, BP said April 28 that it would maintain its dividend. Similarly, U.S.-based Exxon Mobil Corp. and Chevron Corp. both announced May 1 that they would pay out regular dividends this quarter.

Goldman Sachs said the use of variable dividends, as opposed to progressive dividends, could be the answer to the dividend issue facing oil companies. A progressive dividend is one that is expected to rise in line with gains in a company's earnings per share. However, if EPS stumbles, the dividend does not necessarily get cut. Variable dividends are paid out once a year and are based on the company's performance.

"We believe that this could potentially offer a solution for Big Oils, with the companies able to distribute more during periods of commodity upcycles whilst also offering the flexibility to distribute less during the downcycle in order to preserve balance sheet strength and maintain financial resilience," Goldman Sachs said.

Norway-controlled Equinor ASA was the first to reduce its dividend, but Shell's announcement that it would cut the payout to investors took the market somewhat by surprise. It is the first time in more than 70 years that the Anglo-Dutch major, known for its solid dividend, has opted for a cut.

In April, benchmark Brent crude oil futures slumped to their lowest level in more than 20 years, while West Texas Intermediate crude oil futures on the New York Mercantile Exchange cratered $55.90 on the day April 20 to settle in negative territory for the first time ever.

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