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Royal Dutch Shell - Updated fourth quarter guidance

Nicholas Hyett | 20 December 2019 | A A A
Royal Dutch Shell - Updated fourth quarter guidance

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Shell has updated guidance for the fourth quarter.

Quarterly production in the Upstream business is now expected to be between 2,775-2,825 barrels of oil per day, a slight improvement on previous expectations. Refinery and chemical plant availability in Downstream is set to come in ahead of expectations, while corporate expenses are significantly lower than anticipated.

Impairment charges during the quarter are expected to be between $1.7 and $2.3bn.

The shares opened broadly flat following the announcement.

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Our View

Oil prices are pretty middle of the road at the moment. Nonetheless, Shell's top quality assets can pump oil at a handy profit and it's much the same story in natural gas.

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. Economic conditions means timing might slip a bit, but the group had hoped to pay out $125bn between 2020 and 2025.

But 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.

Demand's still rising for now, fuelled by developing markets like India and China, but some 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.

Shell remains an oil & gas major though. And while it's due credit for a strong operating performance that's kept 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.

If conditions remain as they are, the buyback will cut the number of shares in circulation, which would 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 6.3% 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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Third Quarter Results (31 October 2019)

Underlying profits fell 15% in the third quarter, to $4.9bn, as lower production and weaker prices, weighed on performance in the Upstream oil & gas business.

The scale of debt reduction and buyback plans remain unchanged, but the pace may be slower than previously expected given changing conditions. The quarterly dividend remains unchanged at 47 cents per share and the group announced the next $2.75bn tranche of its share buyback.

The Integrated Gas business saw underlying profits rise 17% to $2.7bn, driven by higher liquid natural gas (LNG) sales and LNG trading. Upstream profits fell 52% to $907m, as production declined 2% and oil and gas prices dropped substantially.

Profits rose 7% in the Downstream business to $2.2bn, with healthy growth in Oil Products, offset by a weaker Chemicals result - where the group contended with reduced production and lower margins.

Losses in the Corporate centre hit $817m, up 106.8% year-on-year, as the group suffered from adverse currency movements and lower tax credits.

Quarterly cash flows from operations rose 1% to $12.3bn, with free cash flow of $10.1bn. Shell reported capital expenditure of $6.1bn in the quarter, up 3.3% on a year earlier.

Gearing, a measure of debt as a percentage of total capital, stood at 27.9% at the end of the quarter.

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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.

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