Overview

Royal Dutch Shell PLC (LON: RDSA) is a petrochemical and energy company operating globally and is engaged in the business of exploration, production, refining and promoting natural gas and oil. The company explores for natural gas and crude oil globally, in conventional fields and from other sources, such as coal formations, tight rock and shale. The group also manufactures and markets chemicals. Royal Dutch Shell PLC, which is incorporated in England and Wales, is the parent company of the Shell group. The group's operations are differentiated into three operating segments: Integrated Gas and New Energies, Upstream and Downstream. The Integrated Gas business is involved in the activities related to the liquefaction and transportation of gas. All the activities related to the conversion of natural gas into liquid energies and other products are also part of Integrated Gas business. The activities related to Upstream, which includes extraction and exploration of natural gas, natural gas liquids and crude oil, and transportation and marketing of gas and oil, Oil Sands, which include the production of synthetic crude oil from bitumen extracted from mined oil sands. All such activities are carried out through the Upstream segment. The activities related to the manufacturing and marketing of oil products and chemicals are engaged through the Downstream segment. The company has an employee base of around 86,000 employees in over 70 countries globally.

The current Chair is Charles O. Holliday, who was appointed in 2015. Ben van Beurden holds the responsibilities of the Chief Executive Officer and joined the group in 1983. Jessica Uhl holds the responsibilities of Chief Financial officer.

Key Statistics




Top Shareholders

 

Recent News

Royal Dutch Shell PLC will be announcing its Fourth-quarter results, and full-year results on 30th January 2020, Thursday along with interim dividend announcement for the fourth quarter.

Segments

The company’s operations are divided into three reportable segments being Downstream, Upstream and Integrated Gas for management purpose. In the Q3 FY2019, the company’s revenue surged from the Upstream segment, while the revenue from Downstream and Integrated Gas businesses have declined for the period. For the nine months period, the company’s revenue surged from the Upstream segment, while the revenue from Downstream and Integrated Gas businesses have declined for the period.

The earnings for the Q3 Financial Year 2019 increased from the Integrated Gas and Downstream businesses, while the earnings from the Upstream business has declined for the period. The earnings for the 9M Financial Year 2019 increased from the Downstream business, while the earnings from the Upstream and Integrated Gas businesses have declined for the period.

The capital Investment in the Integrated Gas and Downstream businesses have increased in the Q3 financial year 2019, while the capital Investment in the Upstream business has declined for the period. For the nine months period, the capital Investment in the Integrated Gas and Downstream businesses have increased, while the capital Investment in Upstream business declined for the period.

Financial Highlights - Q3 FY2019 and 9M FY2019 ( US$ million)


(Source: Quarterly Report, Company Website)

During the 9M of the financial year 2019, the group’s revenue declined by 8.83 per cent to $260,871 million versus $286,151 million recorded in 9M FY2018, due to the decline in the revenue from Integrated Gas and Downstream segments during the period. The revenue from the Q3 financial year 2019 declined to $86,892 million from $100,151 million in Q3 FY2018. The total revenue and the other income stood at $267,041 million in 9M FY2019 versus $291,930 million in 9M FY2018. The total revenue and the other income stood at $89,541 million for Q3 FY2019 versus $101,548 million for Q3 FY2018. 

The company’s total expenditure declined to $244,346 million in 9M FY19 from $264,216 million in 9M FY18. The company’s total expenditure declined to $81,169 million for Q3 FY2019 from $91,811 million for Q3 Financial Year 2018. 

The PBT (Profit before tax) declined by 18.11 per cent from $27,714 million in 9M FY18 to $22,695 million in 9M FY19. The PBT (Profit before tax) stood at $8,372 million in Q3 FY2019 versus a PBT (Profit before tax) of $9,737 million in Q3 Financial Year 2018. 

The company’s profit for the year attributable to the shareholders stood at $14,878 million in 9M Financial Year 2019 as against $17,762 million in 9M Financial Year 2018. The company’s profit for the year attributable to the shareholders stood at $5,879 million for Q3 Financial Year 2019 as against a profit for the year attributable to the shareholders of $5,839 million for Q3 Financial Year 2018. The basic earnings per share declined from $2.14 in 9M FY2018to a basic earnings per share of $1.84 in 9M FY2019. The diluted earnings per share for 9M FY2019 was $1.83 versus diluted earnings per share of $2.12 in 9M FY2018. The basic and diluted earnings per share for Q3 FY2019 was $0.73 versus basic and diluted earnings per share of $0.70 for Q3 FY2018. For the nine months of 2019, the dividend per share was at $1.41, while in third quarter FY19, the dividend per share was $0.47. Capital investment was $20,785 million for 9M FY2019 as compared with $16,999 million for 9M FY2018. Capital investment was $7,759 million for Q3 FY2019 as compared with $5,717 million for Q3 FY2018.

Key Performance Indicators

Cash flow from operating activities
Cash flow generated from operating activities gives the total cash made for the period by the company, including payments and receipts. Royal Dutch Shell Plc’s cash flow from operating activities for the FY2018 stood at $53,085 million as against $35,650 million in FY2017.

Free cash flow
The company’s FCF for FY2018 stood at $39,426 million as against $27,621 million in FY2017.

Return on average capital employed (ROACE)
ROACE is used to measure the efficiency of capital utilisation by the company. The company’s ROACE was 9.4 per cent in FY2018 versus 5.8 per cent in FY2017.

LNG liquefaction volumes(million tonnes)
This indicator measures the operational performance of the company’s Integrated Gas business. LNG liquefaction volumes for the FY2018 stood at 34.3 million tonnes versus 33.2 million tonnes in FY2017.

Project delivery on budget
This KPI measures the company’s capability of project completion within budget and on time. In FY2018, the company’s Project delivery on a budget was at 97 per cent versus 93 per cent in FY2017.

Financial Ratios
 
 

The reported gross margin in Q3 FY2019 increased by 1.5 per cent to 19.3 per cent against 17.8 per cent reported last year for the same period. The reported EBITDA margin of 13.1 per cent for the Q3 FY2019 stood lower than the industry median of 19.4 per cent. The reported operating margin in Q3 FY2019 declined by 1.6 per cent to 7.6 per cent from 9.2 per cent reported last year for the same period. The reported Pretax margin of 9.7 per cent for the Q3 FY2019 stood the same as the industry median of 9.7 per cent. Net margin reported was 7 per cent for the Q3 of the financial year 2019, reflecting an increase of 1 per cent when comparedwith last year data for the same period. Return on equity for the Q3 of the Financial year 2019 stood at 3.1 per cent, which remained the same as the industry median of 3.1 per cent. On the liquidity front, Royal Dutch Shell Plc’s current ratio was lower than the industry median of 1.25, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Royal Dutch Shell Plc’s was 0.47x, which was slightly higher as compared to the industry median of 0.46x, reflecting that the company is more leveraged as compared to its peers.  

Share Price Performance

Daily Chart as at December-4-19, before the market close (Source: Thomson Reuters)

On December 4, 2019, at the time of writing (before the market close, at 10:50 AM GMT), Royal Dutch Shell Plc shares were trading at GBX 2,176.50, up by 0.72 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,811.38/GBX 2,152.75. Stock’s average traded volume for 5 days was 6,214,887.40; 30 days – 6,630,070.93 and 90 days – 6,536,006.10. The average traded volume for 5 days was down by 6.26 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.92, reflecting lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £170.08 billion, with a dividend yield of 6.85 per cent.

Valuation Methodology
Method 1: Price to Earnings Approach (NTM)
 


To compare Royal Dutch Shell Plc withits peers, Price/Earnings multiple has been used. The peers are Tullow Oil Plc(NTM Price/Earnings was 9.68), BP Plc(NTM Price/Earnings was 10.97), TechnipFMC Plc(NTM Price/Earnings was 12.88), Cairn Energy Plc(NTM Price/Earnings was 23.66) and I3 Energy Plc(NTM Price/Earnings was 14.40). The average of Price/Earnings (NTM) of the company’s peers was 14.32x (approx.)

Method 2: Price to Cash Flow Approach (NTM)
 


To compare Royal Dutch Shell Plc with its peers, Price/Cash Flow multiple has been used. The peers are TechnipFMC Plc(NTM Price/Cash Flow was 8.97), Cairn Energy Plc(NTM Price/Cash Flow was 5.27), Total SA(NTM Price/Cash Flow was 4.76), BP Plc(NTM Price/Cash Flow was 4.36) and Tullow Oil Plc(NTM Price/Cash Flow was 5.34). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.74x (approx.)

Growth and Risk Assessments

The company has been carefully reviewing its costs and level of investments made for more improved financial and operational performance. In Brazil and India, the company has witnessed good growth due to the economic recovery and high oil and gas prices. The company expects weak economic growth in some advanced economies in the H2 of the financial year 2019. The Chinese market had shown slow growth due to the ongoing trade tensions with the US.The company’s operations will be impacted negatively due to the ongoing uncertainly created by Brexit as it will impact the company’s supply chain. The fluctuation in oil and gas prices, risks associated with international operations and stiff competition could also affect its operations.

Conclusion

The company carries out the development, engineering, construction and facilities operation and maintenance, and provides training services for the oil and gas industry. Despite week top-line and the bottom-line performance, the company has reduced its total expenditure in the third quarter and for nine months period of the financial year 2019. New contracts, increasing demand for oil and petroleum products and upstream investment forecast for 2019 could provide new growth opportunities to the company. In Q3 FY19 and 9M FY19, the company continued to deliver robust cash flow and earnings. The company’s earnings show the resilience and ability to capitalise on the market conditions, with healthy trading.
 
During the fourth quarter of 2019, the group's LNG liquefaction volumes are expected to be between 8.8 mt to 9.4 mt, and integrated gas production is expected to be between 920 thousand to 970 thousand barrels of oil per day. Upstream Production is projected to in between 2,650 thousand to 2,800 thousand barrels of oil equivalent, and Refinery availability would be ranging from 87 per cent to 92 per cent, respectively.

Over the course of 4 years (FY14 - FY18), the company’s net income surged from USD14,874 million in FY14 to USD23,352 million in FY2018. Compounded annual growth rate (CAGR) stood at 11.94 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 2,155.50 (as on 4^th December 2019, before the market close at 8:10 AM GMT) with high single-digit upside potential based on 14.32x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 5.74x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.76673 GBP

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