Royal Dutch Shell PLC (LON: RDSA) – Cleaner and Greener Energy, the Key Focus for Energy Transformation

Royal Dutch Shell PLC is a global energy and petrochemical company. The Company has a presence in more than 70 countries, and it has over 83,000 employees. It has expertise in exploration, production, marketing and refining of oil and natural gas. It is also engaged in the manufacturing and marketing of chemicals. Royal Dutch Shell uses disruptive technologies to build a sustainable energy future. The Company also invests in wind energy and solar energy and use of fuels such as biofuels and hydrogen. The Company is providing access to 165,000 electric vehicle charging points globally. It has partnered with Microsoft for providing integrated energy solutions. It has access to renewable energy of around 6 GW. The Company has a solid asset portfolio, and there are multiple projects that are either in the development or construction phase, and once these projects come online, it will further strengthen the production. Royal Dutch Shell is a FTSE-100 listed company.

On 4 February 2021, the Company will announce the fourth quarter 2020 results and fourth quarter 2020 interim dividend.

(Source: Company website)

Growth Prospects and Risk Assessment

The technology and innovation are at the core of meeting global energy needs, and the Company is in continuous search for technologies and innovations that have potential relevance to the energy business. The Company has spent a significant amount of money on research & development, and it has main technology centres in India, the Netherlands, and the US. It has other centres in Brazil, China, Germany, Oman and Qatar. The Company has a strong patent portfolio, and it has around 9,449 granted and pending patent applications.

The Company is focussed around nine core that are resilient assets with growth potential and strong value. It also has deep-water growth options in the Gulf of Mexico and Brazil. The Company has a target to transform the current refining portfolio into six energy and chemical parks by 2025. Royal Dutch Shell plans to deliver synergies through the integration of refining and chemicals that would bring clients and assets together. The Company is also focussed on gas-enabled energy transition that will be driven by new policies and favourable economics supported by coal to gas switching. Apart from transition and integration of business to achieve growth, sustainable and cleaner energy will be at the forefront of every decision.

From the financial aspect, the Company has achieved significant growth in revenue. The revenue has grown at a CAGR of around 9.8% between 2016 and 2020. It has generated healthy shareholder return through dividend payouts and shares buyback programmes. Royal Dutch Shell has a significant liquidity headroom, and it generates a consistent cash flow.  

(Source: Company website)

Meanwhile, if the Company is not able to deploy the right technology, it could affect the delivery of the strategy and license to operate. The volatility in the prices of crude oil, natural gas, oil products and chemicals would impact the business and profitability of the Company. The Company has worldwide operations, and any economic or political event that disrupts the business continuity is a key threat to the Company. If the Company is not able to achieve strategic goals and deliver a consistent shareholder return, it can impact the reputation of the Company.

Industry Outlook Dynamics

The energy prices have been very volatile in 2020, and the pandemic has further deteriorated the trading conditions. The macroeconomic conditions are expected to hurt the demand for oil, gas and related products. Much of the demand has been impacted due to a slowdown in the industrial sector. The commodity market is expected to remain volatile due to uncertainty in the oil supply. The production in the remaining of 2020 is expected to be limited due to regulatory norms and evolving market conditions.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Royal Dutch Shell Plc.

A Glimpse of Business Segments (Q3 FY20)

Q3 FY20 and 9M FY20 Trading Update (for the period ended 30 September 2020, as on 29 October 2020)

(Source: Company Website)

• In the third quarter of 2020, the Company witnessed an improvement in performance from all the businesses, the revenue increased versus Q2 FY20, while it remained below Q3 FY19 data.
• Income attributable to Royal Dutch Shell shareholders stood at US$0.5 billion for Q3 FY20, which reflected lower realised prices for LNG and oil as well as lower realised refining margins and production volumes compared with the corresponding period of the last year. However, the Company has given the profit in Q3 after making a loss in Q2 period.
• In Q3 FY20, the adjusted earnings were US$1.0 billion, which has shown an increase from the previous quarter.
• Cash flow from operating activities increased to US$10.4 billion in Q3 FY20 against the previous quarter, which included positive working capital movements of US$1.4 billion.
• Led by strong cash flow generation, the gearing decreased to 31.4% at the end of Q3, compared with 32.7% at the end of Q2.
• The Board announced an interim dividend in respect of Q3 FY20 of 16.65 US cents per A ordinary share and B ordinary share.
• In Integrated Gas division, the Company has made a joint venture with CrossWind consortium during the quarter and was awarded the tender for the subsidy-free offshore wind farm Hollandse Kust in the Netherlands.
• The Company had completed the sale of the US Appalachia shale gas position to NFG Midstream Covington, LLC and Seneca Resources Company, LLC. The consideration amount of US$541 million (less closing adjustments) was paid fully in cash.
• Integrated Gas and Upstream production are expected to be nearly 830-870 thousand boe/d and approximately 2,300 - 2,500 thousand boe/d, respectively, in Q4 FY20.
• While, in Q4 FY20, LNG liquefaction, Oil Products sales and Chemicals sales volumes are projected to be around 7.9 - 8.5 million tonnes, approximately 4,000 - 5,000 thousand b/d and nearly 3,500 - 3,900 thousand tonnes, respectively.
• In Q4 FY20, the refinery utilisation and Chemicals manufacturing plant utilisation are expected to be approximately 69% - 77% and approximately 77% - 85%, respectively.
• For FY20, the Corporate Adjusted Earnings are expected to be a net expense of approximately $3,200 - $3,500 million.
• The Company is confident that its integrated business model and high-quality assets will help them to overcome uncertain times.
• During Q3 FY20, Shell witnessed a strong contribution from crude and oil products, capacity optimization, and lower operating expenses, which will help then to overcome uncertain times.
• Overall, it has shown improvement in financial performance in Q3, with positive income from shareholders and higher cash flow from operating activities.

Financial Ratios (Q3 FY2020)

Share Price Performance Analysis

On 25 November 2020, at the time of writing (before the market close, at 10:05 AM GMT), Royal Dutch Shell Plc shares were trading at GBX 1,349.80, down by 1.71% against the previous day closing price. Stock 52-week High was GBX 2,338.59 and Low of GBX 878.10, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 20-day (around GBX 1,131), 50-day (approximately GBX 1,043) and 100-day (around GBX 1,112) simple moving average price. MACD line is placed above the central line, indicating a bullish setup.

Based on the six months return, the RDSA shares have outperformed the FTSE-All Share Oil & Gas Producers index, whereas the return is slightly lower than the FTSE-100 return. The RDSA shares generated a return of 4.93%, whereas the FTSE-100 index and FTSE All-Share Oil & Gas Producers return was 5.97% and -0.7%, respectively.  

In the last three months, RDSA share price has delivered around 18% return as compared to the approximately 5% return of FTSE 100 index, which shows that the stock has outperformed the index during the last three months.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Business Outlook Scenario

In Q3 FY20, the Company had a decent performance despite the impact of the pandemic. The Company generated a cash flow from operations of USD 10.4 billion and free cash flow of USD 7.6 billion. In the near-term, the Company targets a cash capital expenditure of USD 19-22 billion, of which 35%-40% will be for Upstream business, 35%-40% for Transition business and around 25% for a Growth business. It will also target reducing net debt to USD 65 billion, and the Company has a current net debt of USD 73.5 billion with a gearing of 31.4%. Royal Dutch Shell has set a priority of distributing 20%-30% of cash flow from operations to shareholders that includes share buyback and dividends.

In Q4 20, the Company expects an integrated gas production of around 830-870 thousand boe per day. The LNG liquefaction volumes are expected to be nearly 7.9 -8.5 million tonnes. The Upstream production is expected to be around 2,300-2,500 thousand boe per day. The refinery utilisation for oil-related products is expected to be around 69%-77%, and the sales volume are expected in the range of close to 4,000 -5,000 thousand barrels per day. The adjusted earnings net of expense in Q4 FY20 is forecasted to be around USD 800-875 billion. 

Considering the sustainable business model, decent operating and financial performance, robust cash generation, lower net debt, improved profitability margins, positive working capital movements, net-zero emissions energy business by 2050, consistent dividend payout trajectory from the last 13 years, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Royal Dutch Shell at the current price of GBX 1,349.80 (as on 25 November 2020, before the market close at 10:05 AM GMT), with lower-double digit upside potential based on 6.30x EV/NTM EBITDA (approx.) on FY20E EBITDA (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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