Shell has announced that ending Arctic exploration plans, backing out of a Canadian Oil Sands development and writing down shale gas assets and other impaired properties has led to an exceptional charge of $7.9bn in the quarter, taking the Group's overall Q3 earnings to a loss of $6.1bn compared to a profit of $5.3bn in the prior year.
An unchanged dividend of 47 US cents was declared. RDS"B" shareholders will receive the dividend in sterling. The shares dipped around 1% as the market grappled with the vast number of moving parts underlying these results. The underlying picture showed sharp declines in upstream profits as low energy prices took hold, and a stronger performance in the downstream business, where refining margins were higher. Basic current cost of supplies (CCS) earnings were 70% lower than the prior year, but cash flows were more resilient, with Shell generating $11.2bn of cash from operations (2014 Q3: $12.8bn).
The cash generation means that Shell's gearing is little changed on a year ago, at 12.7% and both net investments and dividend payments were covered by operating cash flow. The company described the decisions they have taken to reduce costs and capital investments as "difficult, but impactful", necessary to make Shell "more focused and competitive".
Once again, Shell have described the pending BG deal as a springboard to focus the group further toward deep water and integrated gas developments.
Yield support, is one of those stockmarket phrases that works wonderfully, with hindsight. Yield only provides any support whilst the market believes that the yield can carry on. Recently, Shell has been dragged lower by the oil price and the market has been acting as though it did not believe that the dividend could be maintained longer term.
That of course flies in the face of history; Royal Dutch Shell is famous for its dividend track record, and half of Holland would keel over in apoplectic horror if Shell ever cut the payout. Shell is yielding around 7.2% on the promised (but not guaranteed) $1.88 2015 dividend payment.
The merger with BG, as the company points out, supports the dividend under "any expected oil price scenario". That's because BG's Brazilian and Australian projects have strongly rising production profiles and relatively low operating costs. So Shell are basically promising that the dividend is safe, unless the unexpected happens.
Lower capex, swingeing opex cuts and substantial disposals over the next five years should all support cash flow and put some sort of a cap on debt levels, providing some headroom for the dividend. But nothing is guaranteed. Especially when the Middle East is involved. If OPEC keep increasing output to deter shale companies from investing, who can say where the oil price can go. But Shell look to be doing everything they can to protect the dividend and as they say, eventually they should have rising cash flow from BG's assets to help further.
If the company really can convince the market that the dividend is sustainable, come what may, then investors may one day be able to look back at Shell's performance from here onwards and point to yield support having swung it for Shell. Time will tell.
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