Royal Dutch Shell Is a Screaming Buy

Royal Dutch Shell (RDS-A) (RDS-B) announced first quarter ended March 31, 2016 total revenue of $48.5 billion, down 17 percent sequentially from $58.1 million in fourth quarter of 2015 and down 26 percent year-over-year from $65.7 million in first quarter of 2015.

Royal Dutch Shell declared first quarter of 2016 net income of $484 million or $0.07 per diluted share, down 49 percent sequentially from $939 million or $0.15 per diluted share in fourth quarter of 2015 and down 89 percent year-over-year from $4.43 billion or $0.69 per diluted share during the first quarter of 2015.

The upstream and downstream energy production company reported continued sequential and year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment coupled with rising exploration and refining expenditures, continuing to hurt the company’s key margins.

The continuing tough global commodity demand and pricing environment is continuously and negatively impacting the company’s key margins with continued fall in operating cash flows and no share repurchases.
However, Royal Dutch Shell is still committed to returning a majority of the invested capital to the key stakeholders in form of dividends and despite unfavorable global operating conditions, it has delivered $3.7 billion worth of total dividends or $0.47 per share in first quarter of 2016 compared to total dividends of $2.9 billion or $0.47 per share offered during the same period last year.

Looking past the weakness

Considering the company’s downstream operations, refining margins remained notably weaker in every region and primarily driven by greater inventory level, sheer oversupply and a fairly moderate winter in Europe and the U.S. For the chemicals segment, industry cracker margins grew in Asia and Europe as against the same period last year, allowed by additional lowering of naphtha feedstock costs owing to the sharp fall in international crude prices.

The gas cracker margins in the US fell with ongoing decline in ethylene prices and greater than the reductions witnessed for gas prices. However, Royal Dutch Shell’s upstream operational performance is continuing to enhance, with a significant focus on delivering reliability, growing margins and improving the uptime with expansion of underlying production coupled with operating costs minimization.

Royal Dutch Shell is believed to continue to witness decline in profit margins both in the near-term and over a longer term, given the slowly and steadily improving global commodity demand and pricing environment which would initially enable the company to cover its overall costs and later, deliver profitability.

Importantly, 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 the first quarter of 2016 and equivalent to the US dollar dividend declared for the first quarter of 2015, in line with its continued commitment to deliver attractive shareholder returns while generating superior company growth.

A closer look at operations

The strategic acquisition of BG Group plc on February 15, 2016 has resulted in a significant 58% decline in first quarter of 2016 adjusted CCS earnings linked to shareholders to $1.6 billion as against $3.7 billion delivered during the same period last year. Moreover, despite continued increase in oil & gas production and LNG liquefaction volumes Royal Dutch Shell is continuing to witness weaker margins due to a subdued global commodity pricing environment.

Royal Dutch Shell seems keen on returning a majority of the invested capital to its shareholders in the form of dividends amid tough global commodity demand and pricing scenario which, however, would increase the debt burden on the company’s debt-laden balance sheet.

For upstream operations, Royal Dutch Shell executed a total of $38 million worth of divestments for the first quarter of 2016 including the sale proceeds from the Anasuria growth in the North Sea.

For downstream operations, Royal Dutch Shell conditionally declared the sale of its 51% stake held in the Shell Refining Company in Malaysia for approximately $66 million which is expected to complete during the fiscal year 2016.

Therefore, Royal Dutch Shell is focused on enhancing its cash position by strategically selling its non-core assets and thus, allowing it to offer attractive shareholder returns as well.

Conclusion

Overall, the investors are advised to “Hold” their position in Royal Dutch Shell plc considering the company’s healthy long-term growth prospects but currently, weaker financial position with huge total debt of $80.87 billion against weaker total cash position of $11.02 billion only, restricting the company to continue with its daily operations profitably. The profit margin of -0.81% is disappointing as well.
Published on Jun 23, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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