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Royal Dutch Shell B

  Company Sector Current price

  Royal Dutch Shell B (RDSB) Oil & Gas Producers  1622.00 c  +1.30%    Income Lower  Buy
 Analysis last updated on 03/09/15 at 1662p Recommended stop loss of 12.5%

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Company overview

Royal Dutch Shell explores for, produces and refines petroleum. The company produces fuels, chemicals and lubricants. Shell also owns and operates filling stations worldwide. It is the largest listed company in the UK.

Our view

Under/over valued?

In recent years the company has been going through some major capital investment programs, which should lead to cost efficiencies, increased production capacity and higher cash flows. But the lower oil price environment has led the company to reign back on major investment programs.

For Shell, 2013 was characterised by higher depreciation, increased exploration expenses, lower upstream volumes, tough conditions in the refining industry and low US gas prices due to an abundance of shale gas. In 2014, operational efficiency improved and like for like production of oil & gas rose by 2%. But, Royal Dutch, just like most other companies in the sector were punished by the lower price of oil.

However, the Q1 and Q2 (July) trading updates were generally taken well by the markets as the downstream parts of the business, such a refining and petrol forecourts do much better when oil prices are low. These helped mitigate the falling earnings from lower earnings in the upstream business due to lower oil prices. Half year earnings on a current cost of supplies basis fell by 16% to $8,122m. As part of its cost cutting programme the company announced that it will shed 6500 jobs.

Despite the fall in the oil price and the volatility of markets on the back of China concerns, we continue to recommend the shares as a Buy. We believe it still represents a core holding for most low to medium risk portfolios due to the relatively stable cash flows and attractive dividend income that it generates. At 11 times forward earnings, it looks better value compared to the peer group. However, in the current climate we would suggest drip feeding.

UK investors should buy the -B- shares as they are not liable to Dutch tax.

Bullish points

The acquisition of BG Group makes strategic sense as annual cost synergies are expected to be around $2.5 bn per year and add 25% to Shell's proven oil and gas reserves and 20% to annual production. BG Group has some very attractive assets especially those in Brazil and Australia.

The group's portfolio will undergo major reorganisation in the years to come. After investing heavily into productive capacity, the focus is switching to capital efficiency the result of which will be the divestment of lower quality assets. Key regions this will affect will be US and Nigeria.

The company continues to look at offloading non-core operations and build high potential exploration acreage including shale and deepwater fields.

The dividend yield of around 7% remains very attractive and the share price is likely to be supported by a share buyback program.

Shell will look to restructure the downstream business in light of the increased supply of light crude oil in North America and excess industry refining capacity worldwide.

The company has brought down its gearing (debt level) over the last year from 16% to 12%.

The downstream businesses such as refining and petrol sales at the forecourt do better when oil prices are lower. These businesses helped mitigate declining profitability in the upstream business during the first half of 2015.

Bearish points

Fracking and shale production has produced an abundance of oil and natural gas as a result oil prices have fallen in excess of 50% since the summer of 2014. US natural gas prices have fallen a more moderately.

The group have suffered operational difficulties in Nigeria due to continued pipeline sabotage and theft and these are causing environmental damage. The Nigerian government has not been helpful in dealing with these problems.

The lower oil price environment is likely to lead to further asset write downs and increase concerns over the price paid for BG.

The BG Group acquisition will not complete until early 2016 and in that time there are several hurdles to overcome such as regulatory approvals in various countries.

Comment update 3 September 2015

Author: Helal Miah, Investment Research Analyst

The facts

The company actually produces more gas than oil.

Below are the trailing 12 month results to the end of the interim period versus the previous 12 month trailing period. As we are reporting rolling returns below, the data will be different to that which you see on other parts of our web site. Results are as follows


Basic Earnings per Share 134.8 pence
Dividend per Share 119.5 pence
Dividend Yield 6.5%
Revenue £216,769m
Operating Profit/(Loss) £17,548m
Debt to Equity 13.9 %
Cash on the Balance Sheet £13,844m
Dividend Cover 1.3 x


Basic Earnings per Share 167.2 pence
Dividend per Share 115.3 pence
Revenue £ 289,105m
Operating Profit/(Loss) £30,450m
Debt to Equity 19.3%


Basic Earnings per Share -19.4%
Dividend per Share 3.7%
Revenue -25.0%
Operating Profit/(Loss) -42.4%
Debt to Equity -28.0%

Forecast Estimates 2016

Earnings per share 155 p
P/E 10.9 x
Dividend yield 7.0 %

Month(s) company is expected to go ex-dividend


Valued using at least 15 minute delayed prices (where available)

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