Royal Dutch Shell plc (NYSE: RDS.A) with a price target of $39, implying a total return potential of about 50%, including the dividend.
Shell reported significantly lower adjusted earnings in 3Q20, and we expect near-term performance to remain weak, until energy markets can work off excess crude oil inventories and restore a healthy global supply/demand balance. As the company moves past the recent period of heavy capital spending and continues to lower costs, we expect free cash flow to improve significantly. We believe the October 29th decision to raise the dividend by 4% is testimony to that strategy. Our rating stands at BUY.
On October 29, Shell reported adjusted 3Q20 net earnings, on a current cost-of-supplies basis, of $955 million or $0.24 per ADS (equal to two common shares), down from $4.767 billion.
The significant decline in earnings reflected lower realized crude oil, natural gas and LNG pricing; weaker margins in chemicals; and weaker refining margins. Sales totaled $44.021 billion, down 49% from the prior year and below the consensus of $55.454 billion.
Third-quarter 2020 results by division are summarized below.
In the Oil Products segment (formerly Downstream), the company reported a third-quarter adjusted profit of $1.680 billion.
EARNINGS & GROWTH ANALYSIS
The company is taking steps to cut annual operating expenses by $3-$4 billion. It also plans to reduce capital expenditures to $20 billion or less this year (down from its original forecast of $25 billion) and has suspended share buybacks.
Reflect the lingering effects of the coronavirus pandemic on the company’s operations and our forecast calling for weak crude oil and commodity prices for the remainder of the year. The current consensus is $1.45.
Reflect an improving, but still weak energy market, highlighted by tepid volume growth and modest price improvement. The consensus is currently $2.63.
FINANCIAL STRENGTH & DIVIDEND
Fitch rates Shell’s debt at AA-/stable. All ratings are investment grade.
The debt/cap ratio is slightly below the peer average; the ratio has averaged 29.9%.
We view Shell’s access to outside capital as superior and believe that it provides the company with a competitive advantage.
Cash from operating activities was $10.4 billion in 3Q20, compared to $11.4 billion in 3Q19.
On October 29, 2020, Shell increased its quarterly dividend by 4% to $0.3325 from $0.3200 or $1.33 annually.
MANAGEMENT & RISKS
Ben Van Beurden became the CEO of Royal Dutch Shell on January 1, 2014. Mr. Van Beurden joined Shell in 1983 and has held a range of executive positions in both Upstream and Downstream operations and in the LNG business. Prior to becoming CEO, Mr. Van Beurden was the director of the Downstream division and had responsibility for Europe and Turkey.
Shell faces a number of risks, including the possibility that volatile oil prices and refining margins may destabilize earnings. In addition, the company operates in regions of the world where official corruption is endemic, heightening its exposure to unethical business practices. The company’s operations may also be disrupted by political instability. Like other major oil companies, Shell is also exposed to significant environmental risks.
Royal Dutch Shell plc is an Anglo-Dutch multinational oil and gas company headquartered in the Netherlands and incorporated in the United Kingdom. Created by the merger of Royal Dutch Petroleum and UK-based Shell Transport & Trading, it is the seventh largest company in the world in terms of revenue and one of the six oil and gas ‘supermajors.’
On November 5 at midday, BUY-rated RDS.A traded at $26.85, down $0.05.