Buy Royal Dutch Shell for Robust Gains

Royal Dutch Shell (RDS.A) (RDS.B) announced its third quarter 2015 result on 29th Oct. The Oil giant reported revenue of $ 68.7 billion, down 36 % from $ 107.9 billion in the third quarter 2014. The company reported a net loss of $ 6.1 billion on a current cost of supplies (CCS) basis for the third quarter compared to a $ 5.3 billion profit reported last year for the same quarter.

Excluding the one-time items, the company earned $ 1.8 billion, down 70 % from last year’s $ 5.8 billion.

The one-time items for this year’s Q3 included a total charge of $ 7.9 billion of identified items, including $ 2.6 billion in write-offs for Alaska exploration and a $ 2 billion write-down for halting its oil project in Carmon Creek in Alberta, Canada. Out of the $ 7.9 billion of identified items, $ 3.7 billion is because of a revision in oil and gas price outlook. The rest of the charges items i.e. $ 4.2 billion include are due to management actions regarding the longer-term portfolio of the company.

Other positives

The cost effectiveness in the downstream and chemical businesses was much more evident because of higher margins, lower taxes and favourable foreign exchange rates and divestments. Chemicals earnings were 15 % higher than a year ago due to better market conditions and lower costs for intermediates. All in all, the downstream industry saw a strong quarter with an (ROCE) of 19.3 % on a clean CCS basis.

In Nigeria, Shell has sold assets worth $ 4.8 billion over the last five years under its asset sales program in SPDC. A similar effort towards reducing exposure to shale business risk is also under review in Iraq.

In addition, Shell has updated on the deal with BG. The deal is deemed to be completed in early 2016 after approvals of the shareholders of both companies as well as fulfilment of certain preconditions. It will create a simpler and a more profitable portfolio and enhance Shell's free cash flow and also improve its dividend potential in any expected oil price environment.

Conclusion

The downstream business has also seen a good third quarter. So, Shell can benefit from its well balanced portfolio which has even more shifted towards downstream after reducing exposure to exploration and drilling activities at various sites. Further, the deal with BG may bring more strength to Shell’s balance sheet. Lastly, the company has a very low level of debt with a gearing of 12.7 % which has not increased over the past 12 months despite the downturn.

Therefore, Shell appears to be a promising investment opportunity at the moment.

Published on Jan 7, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...