Is Royal Dutch Shell an Opportunity?

Royal Dutch Shell (RDS.A) (RDS.B) announced fourth quarter ended December 31, 2015 total revenue of $58.1 billion, down 15 percent sequentially from $68.7 billion in third quarter of 2015 and down 37 percent year-over-year from $92.4 billion in fourth quarter of 2014.

Shell declared fourth quarter of 2015 net income attributable to its key stakeholders of $939 million, up 58 percent year-over-year from $595 million during the same period last year and compared to a net loss of $7.4 billion in the sequential third quarter of 2015.

The key oil and gas exploration company reported continued sequential and year-over-year decline in its top line primarily due to the ongoing weaker global commodity demand pricing environment coupled with the expanding drilling and fuel refining costs, eating into the margins of the company.

Shell has continued to deliver impressive financial performance which is allowing superior performance leadership among the key competitors.

Focusing in the right places

The key energy company is significantly focused on optimizing its operational expenditures by lowering the headcount for the year, planning for strategic divestments, deferral or re-phasing of major projects, marking supply chain optimization with notable cost control, dilution of share price and subsequent exit.
During 2015, Shell executed nearly $8 billion worth of capital investments and recorded $4 billion of operating expenditures. Going forward into 2016, Shell further expects significant reduction in capital investments to about $3 billion for both consolidated Shell and BG in addition to lowering of operating expenditures for the year to approximately $3 billion.

The ongoing reduction in major capital investments, avoidable expenses and streamlined processes is believed to help the company to soon recover from the continuing weaker global commodity demand and pricing environment and encourages it to deliver sustainable bottom line growth and shareholder returns.

Shell is expected to continue to deliver 9.7 mtpa of LNG and approximately 800 kboe per day of production still under development during the period from 2018 till 2020. The company growth is expected to continue beyond 2017 with BG adding significant potential.

The key energy company is continuing to restructure its operating structure while improving the downstream performance through benefited feedstock and supply, developing products portfolio and brand image coupled with expanding footprint.

Shell is continuing to focus on adding to its balance sheet strength by strategic non-core asset sales while delivering innovative upstream projects. The complete process optimization and enhancement in downstream performance is believed to somewhat improve the currently debt-burdened financial position of the company and projecting it strongly for sustainable long-term growth.

The Board of Directors at Royal Dutch Shell plc recently declared an interim dividend of US$0.47 per ‘A’ ordinary share (“A share”) and ‘B’ ordinary share (“B share”) for fourth quarter of 2015 payable February 19, 2016 as of February 4, 2016.

The consensus estimate among 27 polled investment analysts evaluating Royal Dutch Shell Plc suggests that the company would outperform the market. This consensus estimate is maintained since the investment analyst’s sentiments got better on Jun 23, 2015. The earlier consensus estimate suggested investors to hold their position in the company.

The key investment analysts are quite positive about the growth prospects of Shell primarily driven by notable cost optimization efforts being take by the company and slowly but continuously improving international commodity demand and pricing scenario, benefiting the company over a longer term.

Conclusion

Overall, the investors are advised to “Hold” their position in Royal Dutch Shell Plc considering the company’s significantly debt-burdened balance sheet with notable total debt of 55.59 billion against weaker total cash position of $31.85 billion only, restricting the company to continue with its daily operations profitably. The profit margin of 0.53% is only satisfactory.
Published on Mar 21, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...