Royal Dutch Shell Plc B Shares (RDSB) EUR0.07
HL comment (7 April 2021)
Shell has estimated that a Texas winter storm will reduce first quarter underlying profits-after-tax by up to $200m. The impact will be concentrated in Upstream ($40m), Oil Products ($80m) and Chemicals ($60m) - while the effect on Integrated Gas is expected to be limited.
More detailed first quarter results will be released on 29 April 2021.
The shares rose 1.1% in early trading.
Shell's set the stage for a worse-than-expected first quarter because of a winter storm in Texas. But the group can hardly control the weather, and in the grand scheme of things, the damage is limited. So it's important to focus on the bigger picture.
Shell was hit hard by the complete collapse of oil prices last year and the subsequent fall in global demand as economies round the world went into lockdown.
Oil majors like Shell are better placed than smaller rivals, but this was still cripplingly bad news for profits. Underscoring the severity of the situation, management have cut dividend for the first time since WWII. The group plans to return to modest growth next year - but it's from a far lower base, and the latest update suggests the bar has been further dropped.
While the oil price has recovered more recently - taking some of the pressure off the group. The group reckons $60 a barrel as a long-term average, but the oil price has been below that for large parts of the last 5 years.
Given the backdrop it's no surprise Shell is taking a hatchet to the cost base. Aside from cutting the dividend, the group is on track to take $3-4bn off operating costs over 12 months and 20% off planned capital investment. Despite those efforts impairments to asset values have been pushing up gearing (debt as a percentage of total assets) in the short term, and restoring the balance sheet to good health is likely to soak up more cash going forwards.
The other major demand on the group's cash flow is a transition away from carbon intensive fossil fuels. However, the transition is slow, and we're not yet clear on the likely returns on investment. Profits will continue to be driven by oil & gas for years and perhaps decades to come.
Overall Shell has a tough time ahead. The group's resources are immense but not infinite, and it needs higher oil prices before it can get back onto the front foot. While we think demand for oil will strengthen again once the world economy recovers from COVID-19, how long that takes and what scars Shell is left with remain to be seen.
First Quarter Trading Update
Shell's Integrated Gas business is expected to produce between 920 and 960 thousand barrels of oil equivalent per day, slightly above previous guidance. Volatile gas prices and the Texas storm had a "limited" impact on profits, but cash flow from operations was impacted by an increase of money owed to the division, driven by higher commodity prices.
In Upstream the group is expected to see a 10 to 20 thousand barrel per day production decline, bringing the total to between 2,400 and 2,475 barrels of oil equivalent per day. Profits are expected to be positive, due in large part to buoyant commodity prices.
Trading in the Oil Products division is expected to outpace fourth quarter performance, with improved margins and lower costs offsetting a decline in sales volumes.
The Chemicals division should benefit from improved margins, though sales volumes of 3,500-3,700 tonnes are expected to fall short of previous guidance. Manufacturing plant utilisation expectations have also been revised down to 77%-81%.
The Corporate segment is expected to post a net expense of $600-$700m, excluding currency impacts.
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