Royal Dutch Shell: Looking at the Long Run
Royal Dutch Shell (RDS.A) (RDS.B) has lost nearly half its market capitalization amid lower oil prices since mid-2014. It does not come as a surprise since the same was observed across the industry for the past one year. But, what makes the difference is how each company reacts to this downtrend. Shell has taken a number of initiatives to stand its ground in the current market situation. Starting with its numbers for the second quarter, let’s see in detail.
Trying to overcome the weakness
Last quarter, Shell’s revenue fell around 35% from last year to $72.4 billion, while earnings adjusted for special items declined to $1.20 a share compared as to earnings of $1.94 per share in the same period last year.
Shell will cut 6,500 jobs this year, which coupled with other spending cuts, should lead to a 10% reduction its operating costs. In fact, if we look in the chart below, Shell’s operating cost performance is better than its peer group, which reflects the strength of its efficient strategies. Further, the oil producer will reduce its capital spending to the tune of $7 billion in the current fiscal, which represents a reduction of around 20% from last year. Thus, Shell now intends to spend around $30 billion in capital spending, which is in fact $3 billion less than what it gave three months back.
More positive moves
Apart from cost reductions, asset sale is yet another prudent strategy adopted by the company to mitigate the impact of the present crisis. Since 2014, the company has sold assets worth $20 billion and going forward, Shell expects to sell more assets worth around $30 billion between 2016 and 2018.
Additionally, the company has purposely delayed many potential projects in order to manage affordability and to get better value from the supply chain in the present downturn. Currently, Shell is searching for low NPV breakeven projects, which has value less than $70 a barrel. Interestingly, the company sees opportunities near $50 a barrel.
The company is also looking for growth inorganically and has made good progress toward the acquisition of BG Group Plc, a deal valued at $70 billion. In July, Brazil gave its approval towards this deal and as per the recent reports the European Commission has also approved the acquisition of BG Group by Royal Dutch Shell. Speaking about the deal Shell CEO Van Beurden said that, the addition of BG will provide a leading position to Shell in two main segments of the industry, namely deep water developments and liquefied natural gas.
Also, Van is confident that the deal will also bolster Shell’s ability to maintain its proposed dividends. Additionally, in its upstream business BG's portfolio has the potential to sustain or even further reduce its current unit operating of around $19 a barrel. Thus, despite the present downturn the deal will support its bottom line in the days to come.
I think that Shell is making the right moves that will streamline its balance sheet. Though it does not have any forward P/E, but its initiatives seem promising. Moreover, the stock has nearly halved since mid last year and is currently near its all time lows. Thus, Royal Dutch Shell could be a good investment option from a long term perspective.