Royal Dutch Shell PLC (LON: RDSA) – Achieved the annual divestment target of around USD 4.0 billion during Q1 FY21

Royal Dutch Shell PLC is an 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 convert 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 18 May 2021, RDSA will have its Annual General Meeting.

(Source: Company presentation) 

Recent trend of dividend payments - RDSA will pay an interim dividend of 0.1735 US cents per share for Q1 FY21 on 21 June 2021, up by around 4% from the last quarter. The ex-dividend date is 13 May 2021.

Growth Prospects and Risk Assessment

• Decarbonising the transport sector – RDSA had signed agreements to charter ten new crude tankers powered by dual-fuel engines aiming to deliver 50% of chartered crude tankers to run on LNG by 2023. The Company had also expanded the bunkering network by chartering a new LNG bunkering supply vessel constructing in Spain.
• Acquisition of Ubitricity – The Company had acquired Ubitricity (number 1 on-street charging network in the UK), which is operating around 75,000 charging points to tackle carbon emissions.
• Disposal of upstream assets in Egypt’s Western Desert – The consortium made up of subsidiaries of Cheiron Petroleum Corporation, and Cairn Energy would acquire Shell’s upstream assets in Egypt’s Western Desert for a base consideration of USD 646 million and additional payments of up to USD 280 million between 2021 and 2024 based on the oil price and results of further exploration.

(Source: Company presentation)

Key Risks

• Uncertainty in oil supply - It would cause volatility in commodity markets, which can affect the earnings and profitability of the Company.
• Financial risk – RDSA is also exposed to financial risk associated with foreign exchange rates and interest rates movements. Also, there is a significant risk of changes in the fair value of its financial assets and liabilities with the economic downturn.
• Other significant risks - climate change, legislative, fiscal, and regulatory developments, economic and financial market conditions, and risks associated with the impact of pandemics. 

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of Royal Dutch Shell PLC.

Q1 FY21 Production Highlights (for the three months ended 31 March 2021, as of 29 April 2021)

(Source: Company result) 

• With regards to the profitability, the Company had delivered significant growth of around 724% in adjusted earnings to USD 3.23 billion during Q1 FY21 as compared to Q4 FY20. Moreover, it remained higher than USD 2.86 billion achieved during Q1 FY20.
• The growth in adjusted earnings was boosted by higher realised oil and LNG prices, chemicals, and refining margins.
• Meanwhile, RDSA had managed to reduce the net debt from USD 75.39 billion as of 31 December 2020 to USD 71.25 billion as of 31 March 2021, driven by free cash flow generation in the quarter.
• RDSA had shown a reduction in gearing from 32.2% during Q4 FY20 to 29.9% for Q1 FY21 because of net debt reduction.
• Moreover, RDSA had shown around a 32% jump in cash flow from operating activities to USD 8.29 billion during Q1 FY21 as compared to Q4 FY20.

Financial Ratios (FY2020)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 12 May 2021, at 09:19 AM GMT, RDSA’s shares were trading at GBX 1,370.80, up by around 0.23% against the previous day closing price. Stock 52-week High and Low were GBX 1,598.15 and GBX 878.10, respectively.

RSDA's prices are trading above an upward sloping trend line for the past five months and currently taking support of it, indicating the probability of an upside reversal. On a daily chart, the momentum indicator RSI (14-period) is trading at ~43 levels, suggesting a neutral direction for the stock.

In the last one year, RDSA’s stock price has delivered a positive return of ~21.83%, and it has outperformed the FTSE 100 index with a return of about 16.62%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Peers used in the valuation methodology (Price/NTM Earnings)

Business Outlook Scenario

For the long-term, Shell is continuously investing in generating power from natural gas and renewable sources. RDSA remained upbeat that the integrated business model and high-quality assets would help them to navigate through uncertain times. RDSA stated that it would need measures to reduce oil & gas production, LNG liquefaction as well as utilisation of refining and chemicals plants because of regulatory requirements and infrastructure constraints. Currently, the oil prices surged, driven by accelerated economic recovery and a bright prospect for energy demand. Moreover, the International Energy Agency (IEA) had projected that demand for oil would exceed the output of the top producers.

Nonetheless, RDSA had provided financial and operational guidance for Q2 FY21. The Company had anticipated Integrated Gas production to be ranging from 880 thousand boepd (barrels of oil equivalents per day) to 940 thousand boepd, while the LNG liquefaction volumes would be expected to remain between 7.6 million tonnes and 8.2 million tonnes. Due to lower seasonal gas demand and divestment impacts, RDSA expects Upstream production to be ranging from 2,150 thousand boepd to 2,350 thousand boepd. Furthermore, the Refinery utilisation is expected to fall between 73% and 81%. The Oil Products sales volumes are expected to be ranging from 4,000 thousand boepd to 5,000 thousand boepd. In a nutshell, the Corporate Adjusted Earnings would be expected to be a net expense ranging from USD 600 million to USD 700 million for Q2 FY21 and a net expense ranging from USD 2.40 billion to USD 2.80 billion for the full year 2021. 

Considering the rising oil demand, strong balance sheet, net debt reduction, achievement of divestment target, strong development pipeline, 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 1,370.80 (as on 12 May 2021 at 09:19 AM GMT), with lower-double digit upside potential based on 10.93x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

*The dividend yield is subject to change as per the stock price movement.

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