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Royal Dutch Shell - earnings fall 53%

Charlie Huggins | 4 February 2016 | A A A
Royal Dutch Shell - earnings fall 53%

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Royal Dutch Shell Plc B Shares EUR0.07

Sell: 1,686.20 | Buy: 1,686.60 | Change 39.60 (2.40%)
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In the final full year and fourth quarter results before BG and Shell merge, Shell has announced a fall in full year earnings of 53% to $10.7bn, while Q4 earnings fell 44% versus a year earlier to $1.8bn. These are towards the upper end of guidance provided in last month's production update. Shares rose 3-4% in early trading.

Over the full year Upstream operations provided $1,780m, 16% of total earnings, with downstream contributing the remaining $9,748m.

The group's replacement ratio for the year is expected to be -20%, with SEC proved oil & gas reserves expected to be reduced by 0.2 billion barrels, before taking into account this year's production. The 3-year average headline proved Reserves Replacement Ratio is expected to be 48%.

Gearing currently sits at 14% with the company committing to "take further impactful decisions" to protect the balance sheet if conditions continue. CEO Ben van Beurden said "Shell's dividends for 2015 were $1.88 per share, and are expected to be at least $1.88 per share in 2016".

Both sets of shareholders have now signed off Shell's acquisition of BG.

Our view:

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 forecast to pay a yield of around 8.6% on the promised (but not guaranteed) $1.88 2016 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, swinging 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.

All yield figures are variable and not guaranteed.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.