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Royal Dutch Shell - lower oil prices hit profits

Nicholas Hyett, Equity Analyst | 30 January 2020 | A A A
Royal Dutch Shell - lower oil prices hit profits

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Royal Dutch Shell Plc B Shares EUR0.07

Sell: 1,427.80 | Buy: 1,428.80 | Change 92.20 (6.91%)
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Fourth quarter underlying profits were 48% lower than last year at $2.9bn, with profits down across all divisions. That reflects lower oil & gas prices, and weaker refining and chemicals margins.

Lower profits fed through to lower free cash flow, which at $5.4bn was 67.7% behind the same quarter last year.

The fourth quarter dividend remained unchanged at $0.47 per share. Shell also announced plans to buy back $1bn of shares before the end of April.

The shares fell 3.9% in early trading.

View the latest Shell share price and how to deal

Our View

Oil prices are pretty middle of the road at the moment, and substantially lower than last year. That's seen debt rise. 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 still substantial and 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 multibillion dollar buyback. Economic conditions have made management more cautious, and slow the pace of buybacks as debt reduction becomes a higher priority, but the group still hopes to hit its $25bn target.

But Shell needs to be on its toes. 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, fuelled by developing markets like India and China, but it now looks like 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 does explain why Shell has started investing in greener technologies, including solar and wind.

For now Shell remains an oil & gas major. It's due credit for a strong operating performance that's kept a lid on costs, but the price of the black stuff remains the key factor influencing free cash flow. 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 falls and things get less comfortable.

For now, the prospective yield of close to 6.7% looks attractive to us - although as always this isn't guaranteed. However, the slowdown in buybacks means further planned returns have been pushed further down the line.

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Full Year Results

Total production fell 1% in the quarter to 3.8m barrels of oil equivalent a day (boepd). Meanwhile average global liquid prices fell 5% to $56.60 per barrel and natural gas prices fell 23%. As a result total revenue fell 18.7% to $85bn, while underlying operating costs fell 2% to $10.0bn.

Integrated Gas underlying profits fell 16% to $2.0bn in Q4, reflecting lower prices, a slight decline in production and higher costs. Upstream also struggled with lower prices and higher costs, with underlying profits falling 59% to $778m.

Downstream quarterly underlying profits fell 36% to $1.4bn, with Chemicals falling to a loss during the period on lower margins and reduced plant availability. Refining profits halved on weaker margins.

Corporate costs almost doubled to $1.1bn

Capital expenditure during the quarter fell 7.4% to $6.9bn. However, that was not enough to offset lower cash generation and as a result gearing (a measure of Shell's total indebtedness) rose by 1.4 percentage points quarter-on-quarter to 29.3%.

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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 disclosure for more information.