Royal Dutch Shell - BG and $60 oil are on their bucket list

Royal Dutch Shell (RDSB.L): The third quarter numbers, to 30^th September, were presented on a Current Cost of Supplies basis. This showed negative earnings of $6.1bn (after identified items of $7.9bn) against a $5.3bn profit a year ago and also suffered from a $1bn currency translation headwind. Whilst downstream performed well on the back of cost cutting and good refining margins, upstream was hit by low oil and gas prices. Underlying eps were 28c against 92c a year ago. Cash flow in the quarter was $11.2bn against $12.8bn a year ago. The dividends paid in the quarter cost $3.0bn (of which $0.7bn were settled under the scrip dividend programme). So the cash dividend cost is easily covered by cash flow, although I doubt whether a scrip programme using shares yielding nearly 7% would pass muster at business school, with gearing steady-ish at just 12.7%. Looking at the nine-month numbers, earnings fell 87% to $2.0bn, with underlying eps down 54% at 140c. Cash flow was down 31%, but is still a still hefty $24.4bn. The large $7.9bn of identified items was dominated by $8.2bn of exceptionals (it is almost Halloween after all). These reflected low oil and as prices ($3.7bn) as well as exploration retrenchment such as withdrawing (for now) from Alaska ($2.6bn) and halting work on the Carmon Creek thermal project in Canada ($2.0bn).

Looking out into the fourth quarter, little new joy is offered, as upstream production will be affected by various disposals (and the oil price is still low), whilst refinery availability will reduce due to maintenance schedules. The BG deal is still slated to complete in early 2016. The write-offs have dented the shares today and at 1705p the consensus eps for 2015 of 128.8p is a PE of 13.2x, with 134.3p in 2016 pointing at a PE of 12.7x. Meanwhile the 188c (121.3p) of dividend generates a yield of 7.1%. There is a degree of bravado in maintaining this dividend, but they are banking on an eventual recovery in oil prices, with both BP and Royal Dutch citing $60 per barrel for their assumptions. In current, unpredictable, energy market conditions this is mostly hope, or at least hope that the forward oil price market is right. In the meantime they are cutting costs and cutting capex, whilst the pending BG deal offers the chance to re-shape the portfolio for medium term growth. The strong balance sheet means that this overall strategy can be afforded, without obviously damaging future growth prospects. This all seems more re-assuring than BP, where Macondo and Rosneft along with an upward tweak to their gearing target all raise slight queries in my mind. So I would stick with Royal Dutch Shell in preference to BP. (Neil Cumming^, 29^th October 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower