Royal Dutch Shell Is an Opportunity

Royal Dutch Shell (RDS-A) (RDS-B) announced second quarter ended June 30, 2016 total revenue of $58.4 billion, up 20 percent sequentially from $48.6 billion in first quarter of 2016 but, down 19 percent year-over-year from $72.4 billion in second quarter of 2015.

Shell declared second quarter of 2016 net income of $1.28 billion, up 181 percent sequentially from $455 million in first quarter of 2016 but, down 69 percent year-over-year from $4.11 billion during the same period last year.

The international oil and gas company reported continued year-over-year decline in both its top and bottom lines primarily driven by the ongoing weaker global commodity demand and pricing environment coupled with the expanding energy exploration expenditures, eating into the company’s key margins.

Shell is continuing to witness year-over-year bottom line contraction mainly due to higher energy exploration expenditures along with weaker international commodity demand and pricing scenario, continuing to hurt the company’s key margins while forcing it to avoid any core and non-core capital expenditures.

Managing the downturn     

Shell is impressively managing the continuing down-cycle by reducing the operational expenditures through strategic divestments, optimizing the supply chain, staff and contractors along with maintaining a “Lower forever” mindset while delivering significantly attractive BG synergies.

Despite, Shell proactively managing the overall cost position the company is believed to continue to suffer margin losses indefinitely until the ongoing global meltdown bottoms down and key commodities demand and pricing picks up once again.

Shell has significantly expanded its year-over-year oil and gas volume by about 29 percent to 3.51 million boe per day for second quarter of 2016 compared to 2.73 million boe per day during the same period last year and primarily benefited from the strategic BG acquisition.
LNG liquefaction volumes also grew 38 percent year-over-year from 5.5 million tons in second quarter of 2015 to 7.6 million tons during second quarter of 2016 that also mainly gained from the BG acquisition.

The outlook

The oil and gas exploration major targets on delivering innovative projects through well-planned exploration programs such as the strategic oil discovery for Norphlet play in Gulf of Mexico heartland, in addition of more than 125 million boe of key resources with upcoming wells in the fiscal years 2016 and 2017. Further, since 2010, Shell has added approximately 1.3 billion boe of key resources in the Gulf of Mexico. The company is expected to have vast knowledge of the geological basin, strategic infrastructure proximity and impressive presence in Heartland with keen focus on the field operations.

The consistent increase in high-quality oil and gas production in addition to attractive energy resources available with the company is estimated to deliver sustainable long-term company growth while offering attractive shareholder returns.

Going forward, Shell has provided its production outlook for third quarter of 2016 and estimates nearly -35 kboe/d of security impact for upstream operations at Nigeria SPDC, maintenance impact of about -15 kboe/d.

For the downstream operations, Shell expects third quarter of 2016 refinery availability to only expand marginally, enhance the accessibility of chemicals and nearly -200 kboe/d of major divestment effect on marketing volumes. The consolidated Shell and BG earnings sensitivity for 2016 includes, about $5 billion of total earnings per annum at Brent price of $10/bbl. The upstream operations are projected to deliver approximately $3 billion and integrated gas might deliver about $2 billion in earnings. Shell’s total earnings per annum is believed to be about $250 million at Henry Hub price index of $1/mmbtu.


Overall, the investors are advised to “Hold” their position in Royal Dutch Shell Plc considering the company’s attractive long-term growth prospects with PEG ratio of 1.48 but, currently weaker financial position with significant debt restricting the company to continue with its daily operations profitably.
Published on Aug 17, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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