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Royal Dutch Shell - earnings miss forecasts

George Salmon | 1 August 2019 | A A A
Royal Dutch Shell - earnings miss forecasts

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Royal Dutch Shell Plc B Shares EUR0.07

Sell: 1,351.20 | Buy: 1,351.60 | Change 22.20 (1.66%)
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A weaker than expected second quarter has seen Shell deliver half year earnings of $9bn, down 12.7% with underlying results below prior forecasts.

The shares fell 4.7% on the news.

The second quarter dividend is unchanged at $0.47, and the group also confirmed it intends to repurchase $2.75bn of shares by 28 October as part of the ongoing share buyback.

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Our View

A relatively benign oil price means Shell is in a strong position just now. The group's top quality assets can pump oil at a handy profit and it's much the same story in natural gas, where Prelude, Shell's enormous floating LNG facility off the coast of Australia, has just completed its first shipment.

Cash generation is high, and with debt well under control, Shell's primed for some hefty shareholder returns.

The group's been a perennial income option for decades, and has opened up another avenue of shareholder returns with a $25bn buyback. In total, the group hopes to pay out $125bn between 2020 and 2025.

But of course they're only hopes. For Shell's plans to become reality, the group will need to be on its toes. That's because times are changing, and the dynamics of the oil price are no longer dictated by OPEC. Shale producers have weakened the cartel's grip, and concerns about global warming, the advent of electric vehicles and a backlash against plastic have turned the tables on the peak oil argument.

At the moment demand is still rising, fuelled by developing markets like India and China, but some now think oil demand will run dry before supplies do. We're not convinced this kind of shift is imminent, even in the next 30-40 years, but it might explain why Shell has started investing in greener technologies, including solar and wind.

For now though, Shell remains an oil & gas major. And while it's due credit for a strong operating performance that's seen it successfully keep a lid on costs, the price of the black stuff remains the key determinant of whether free cash flow covers the dividend and buyback. And the oil price is fickle.

Today the price of a barrel of oil is around $63, but back around the turn of the year it had fallen to close to $50. Given the progress on cutting debt, that's still reasonably comfortable for Shell, but the rise shows that conditions can change quickly.

If these prices continue and Shell can keep going with the buyback, there will be fewer shares in circulation, which should boost earnings per share and reduce the cash burden of the dividend. That could be important if the oil price subsequently falls and things get less comfortable.

For now, the prospective yield of close to 5.8% looks attractive to us, and there's scope for that to grow now the group's on firmer footing. As always, there are no guarantees.

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Half year results (on a current cost of supplies basis where applicable)

Integrated Gas was impacted by exceptional items including $479m of write offs, mainly in Trinidad and Tobago and Australia, and $122m of losses on commodity derivatives. Excluding these events, earnings fell 9.5% to $4.3bn. That reflects a 7.7% fall in production as a result of divestments and the reclassification of Salym asset into Upstream, and weaker realised prices.

Upstream underlying earnings were $3bn, up 1.7% as production rose 3.8%, more than offsetting the impact of weaker prices and a higher depreciation charge.

Operating cash flow in both the upstream and integrated gas divisions improved as a result of working capital changes and lower tax payments.

Downstream saw underlying earnings fall 7.8% to $3.2bn as a result of significant disruption within chemicals, including closures for strikes and maintenance. This was only partly offset by growth in marketing, due to stronger retail and global commercial margins, and stronger trading results. Underlying cash flows were $1.8bn compared to $883m last year.

Corporate losses widened to $1.5bn from $844m.

Operating cash flow, rose to $19.7bn, while Shell's capital spend in the half was $10.3bn, marginally ahead of last year. Free cash flow improved to $10.9bn.

A change in accounting rules saw Shell's net debt rise to $74.9bn, with gearing at 27.6%. On an underlying basis the net debt position fell from $62.2bn to $58.8bn, with gearing falling marginally to 23%.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.