Royal Dutch Shell PLC (LON: RDSA) – Delivered strong operational performance in an extraordinary year.

Royal Dutch Shell PLC is a FTSE 100 listed Petrochemical and Energy Company that is involved in the exploring, producing, refining, and marketing of oil and natural gas. The Integrated Gas segment is engaged in activities related to liquefied natural gas, and the conversion of natural gas into gas-to-liquids fuels and other products. The Downstream segment is involved in manufacturing, marketing, and trading activities of oil products and chemicals that converts crude oil and other feedstocks into a range of products that are moved and marketed around the world for domestic, industrial and transport use. The Upstream segment combines the Upstream and Oil Sands segments.

On 29 April 2021, Shell expects to release its Q1 FY21 results and announce the first quarter interim dividend.

 (Source: Company Presentation)

Growth Prospects and Risk Assessment

RDSA is a customer-centric organisation, serving nearly 1 million industrial and commercial customers and 30 million customers at retail service stations every day. Shell is likely to continue its relentless high grading of the portfolio with expected divestment proceeds of $4 billion a year on average. Shell’s decisive steps in FY20 have significantly strengthened its financial resilience, allowing the acceleration of strategic plans and providing clarity on cash priorities. Shell’s sector-leading cash flows should grow the business in the future while increasing shareholder distributions, making the entity a compelling investment case. It also aims to be a net-zero emissions energy business by 2050 or sooner, as it has further developed the integrated power business and commercialised hydrogen and biofuels to support customers’ efforts to achieve net-zero emissions. From a dividend perspective, Shell expects to increase the dividend by around 4% per year. For Q4 FY20, it announced an interim dividend of US$ 0.1665 per A and B ordinary share.

However, there are certain risk and uncertainties to business growth. The recent uncertainty in oil supply has caused volatility in commodity markets, which can affect the earnings and profitability of the Company. Moreover, with the economic downturn, there is a risk of changes in fair value of its financial assets and liabilities. Also, there are financial risks associated with foreign exchange rates and interest rates movements. Further, there is risk associated with climate change, legislative, fiscal, and regulatory developments, economic and financial market conditions, risks associated with the impact of pandemics, and unfavourable foreign exchange and interest rates movement.

Industry Outlook Dynamics

As per the report from Allied Market Research, the global renewable energy market is expected to reach around US$1,512.3 billion by 2025 from US$928.0 billion in 2017. However, there are various factors which will drive the overall global energy demand, such as

• The global population is projected to increase from 1.7 billion in 2019 to 9.2 billion in 2040.
• The global economy is likely to double in the next 25 years. Hence, the rising energy demand for economic activities.
• Increasing awareness of climatic change and carbon emission.

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

Recent Developments

On 11 February 2021: The Company stated that Shell had accelerated its drive for net-zero emissions energy products and services, powered by growth in the customer-facing businesses. This emission will deliver value for customers, shareholders and wider society.

A Glimpse of Business Segments (FY20)

(Source: Company Website, chart created by Kalkine Group)

Financial and Operational Highlights (for the year ended 31 December 2020 (FY20), as on 4 February 2021)

(Source: Company Website)

• In FY20, the Company delivered a decent performance, with lower production volumes and realised refining margins.
• In Q4 FY20, the integrated gas earnings impact was limited due to PSC effects, despite the increased production (against Q3 FY20).
• At the end of the financial year 2020, the net debt decreased to USD 75.4 billion as compared to the end of the financial year 2019, driven by lease additions and lower free cash flow generation.
• Moreover, the Gearing increased to 32.2% at the end of the financial year 2020 as compared with 29.3% at the end of the financial year 2019, due to reduced earnings and increased net debt.
• The Company announced the Q4 interim dividend per share of USD 0.1665 and remained the same against the previous quarter. Therefore, the total dividend per share for FY20 was USD 0.6530.
• Regarding the portfolio developments, the Company has completed the sale of its 30% interest in Oil Mining Lease (OML) 17 in January 2021 for USD 533 million.
• During Q3 FY20, the Company witnessed an improvement in performance from all the businesses, the revenue increased versus Q2 FY20, while it remained below Q3 FY19 data.
• Loss attributable to Royal Dutch Shell shareholders stood at USD 21.6 billion for FY20, which reflected lower realised prices for LNG & 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 the Q2 period.
• In FY20, the adjusted earnings were USD 4.8 billion, down against last year comparatives.
• Further, 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.
• In FY20, Shell witnessed a strong contribution from crude and oil products, capacity optimization, and lower operating expenses, which will help them to overcome the uncertain times.
• The Company aims to be a net-zero emissions energy business by 2050 or sooner, as it has further developed the integrated power business and commercialised hydrogen and biofuels to support customers’ efforts to achieve net-zero emissions.
• It is confident that its integrated business model and high-quality assets will help them to overcome uncertain times.
• As per the outlook for Q1 FY21, the Company expects Integrated Gas production to be approximately 900-950 thousand boe/d, LNG liquefaction volumes to be approximately 8.0 - 8.6 million tonnes, Upstream production to be approximately 2,400 - 2,600 thousand boe/d; Refinery utilisation to be approximately 73%-81%, Oil Products sales volumes to be approximately 4,000-5,000 thousand b/d, Chemicals manufacturing plant utilisation to be approximately 80%-88% and Chemicals sales volumes to be approximately 3,600-3,900 thousand tonnes. 

Share Price Performance

On 3 March 2021 (before the market close, at 8:10 AM GMT), Royal Dutch Shell shares were trading at GBX 1,483.60, up by 0.91% against the previous day closing price. Stock 52-week High and Low were GBX 1,782.60 and GBX 878.10, respectively.

From the technical standpoint, 20-day SMA (1,404.30), and 20-day EMA (1,424.60) are currently supporting an upside potential, which means the stock price could increase in the short term.

In the past six months, RDSA’s share price has delivered nearly a +36.89% return as compared to around +11.32% return of FTSE 100 index, and nearly +28.76% return of FTSE All-Share Resources index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

For the long-term, Shell is continuously investing in generating power from natural gas and renewable sources. It is confident that its integrated business model and high-quality assets will help them to overcome uncertain times. Hence, the Group looks attractive and has the capability to sustain for the long term. The outlook for Q1 FY21 can be seen below:

• Integrated gas production is estimated to be nearly 900 - 950 thousand boe/d.
• Sales volume of oil products is anticipated to be around 4,000 - 5,000 thousand b/d.
• Refinery utilization is projected to be around 73% - 81%.
• Sales volume of chemicals is expected to be nearly 3,600 - 3,900 thousand tonnes.

For the near-term, the Group expects to retain a cash capital expenditure of US$19-22 billion and reduce net-debt to US$65 billion. Following the net debt reduction, Shell targets total shareholder distributions of 20-30% of cash flow from operations. It is also pursuing a US$4 billion of average disinvestment per year and maintaining underlying operating expenses below US$35 billion.

 (Source: Presentation, Company Website)

Considering the decent operating and financial performance, sustainable business model, robust cash generation, lower net debt, improved profitability margins, positive working capital movements, a target of 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 1,483.60 (as on 3 March 2021, before the market close at 8:10 AM GMT), with lower-double digit upside potential based on 4.43x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (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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