Royal Dutch Shell PLC

Royal Dutch Shell PLC (RDSA) is a Hague, Netherlands-based international group of energy and petrochemical company, which engages in exploring, producing, refining and marketing oil and natural gas. 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.

Key Financial Highlights (FY2018, in $m)

(Source: Company Filings)

Income for the period was $23,906 million in 2018, compared with $13,435 million in 2017, while income attributable to shareholders rose by 80% to $23,352 million, driven by benefited from higher realised oil, gas and LNG prices as well as stronger contributions from crude oil and LNG trading. Due to increased production from new field start-ups and ramp-ups, as well as lower maintenance activity, oil and gas production available for sale in 2018 remained flat at 1,338 million barrels of oil equivalent (boe). Capital investment was $24.8 billion in 2018 as compared with $24.0 billion in 2017, while the return on average capital employed rose to 9.4% against 5.8% in 2017. In FY18, the Cash flow from operating activities stood at $53.0 billion, while basic earnings per share rose by 78% to $2.82 per share.

Valuation Methodology
Method: Price/Earnings Multiple Approach (NTM)


Share Price Commentary
 
Daily Chart as at April-26-19, before the market closed (Source: Thomson Reuters)

On 26th April 2019, at the time of writing (before the market closed, at GMT 02:20 pm), RDSA shares were trading at GBX 2,453.5, down by 0.88 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 2,755.00/GBX 2,209.50. The outstanding market capitalisation was around £201.99 billion with a dividend yield of 5.83 per cent.

Conclusion
The company continuously seeks to improve its operating performance and maximise sustainable free cash flow and is on track with its outlook of annual free cash flow of between $30 billion and $35 billion by 2020. The cash flow projection was made at a Brent crude oil price of $60 a barrel, but the oil prices are trading at an elevated level. This augurs well for the company’s finances. Based on strong fundamentals and supported by valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 2,475.50 (as on 25th April 2019) with single-digit upside potential based on 12.76x NTM Price/Earnings (approx.) on FY19E earnings per share.
 

BP PLC

BP PLC (BP) is a London, United Kingdom-headquartered British integrated oil and gas company. The group is a global energy business with wide reach across the world's energy system and has vertically integrated operations; ranging from exploration and production of oil and natural gas to marketing chemicals. The company’s operations are differentiated in three segments: Upstream, Downstream and Rosneft. It has a primary listing on the London Stock Exchange with secondary listings on the Frankfurt Stock Exchange and the New York Stock Exchange.

Key Financial Highlights (FY2018, in $m)
 
(Source: Company Filings)

The company’s total revenue surged by 24.37% to $298,756 million, driven by an increase in upstream and downstream segment business across the USA & Non-US. The group’s profit for the period was $9,383 million, against $3,389 million in 2017. Total dividend paid for the period FY18 was 40.5 cents per share against 40 cents paid last year. Net cash provided by operating activities for the year increased by $4.0 billion from $18.9 billion reported in 2017 to $22.9 billion at the end of 2018. The net debt at the end of the year stood at $44.1 billion, against $37.8 billion in 2017, with a net debt-equity ratio of 30.3% as compared with 27.4% a year ago. In 2018, the return on average capital employed was 11.2% (2017: 5.8%).

Valuation Methodology
Method: Price/Cash Flow Multiple Approach (NTM)


Share Price Commentary

Daily Chart as at April-26-19, before the market closed (Source: Thomson Reuters)

On 26th April 2019, at the time of writing (before the market closed, at GMT 02:25 pm), BP shares were trading at GBX 559.847, down by 1.63 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 603.60/GBX 481.35. The outstanding market capitalisation was around £115.85 billion with a dividend yield of 5.47 per cent.

Conclusion
The company expects underlying production to be higher than in 2018 due to major projects, as five new significant projects are expected to start up in 2019. The group is well cushioned against oil prices volatility and commodity pricing cycles as it has both upstream and downstream businesses, along with well-established trading capabilities. The wide geographic reach of its operations also helps it to diversify exposure to geopolitical events and give access to growing markets and new resources. Based on healthy prospects and supported by valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 569.30 (as on 25th April 2019) with single-digit upside potential based on 5.85x NTM Price/Cash Flow (approx.) on FY19E cash flow per share.
 

Tullow Oil PLC

Tullow Oil PLC (TLW) is a London, United Kingdom-headquartered Africa’s leading independent oil and gas company which works across all stages of the oil life cycle from exploration to production. The group is an Africa-focused oil group with operations across 16 countries. The group’s operations are differentiated in three operating segments: East Africa, West Africa and New Ventures.

Key Financial Highlights (2018, in $m)

(Source: Company Filings)

Though working interest production averaged 81,400 boepd, a decrease of 7% for the year, total revenue increased by around 8% to $1,859 mn, driven by a rise in company's realised oil price, which was $68.5/bbl after hedging and $71.8/bbl before hedging. This led to an increase in gross profit, which grew to $1,082 million and operating profit surged to $528 million. The profit after tax for the year grew to $85 million, from a loss of $175 million reported in 2017. Basic EPS also increased to 6.1 cents as compared to a loss of 13.7 cents per share in 2017. Net debt also fell to $3,060 million from $3,471 million reported at the end of 2017. While free cash flow of $411 million was reported in 2018, opex reduced to $10/barrel. A final dividend of 4.8¢/share was also proposed.

Share Price Commentary

Daily Chart as at April-26-19, before the market closed (Source: Thomson Reuters)

On 26th April 2019, at the time of writing (before the market closed, at GMT 02:30 pm), TLW shares were trading at GBX 228.11, down by 2.84 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 279.35/GBX 163.30. The outstanding market capitalisation was around £3.29 billion with a dividend yield of 1.59 per cent.

Conclusion
While 25 per cent of production is capped at around $80/bbl, 75 per cent remains exposed to higher oil prices. As a result, the group will profit from an upswing in oil prices, like one experienced in recent time, and would enable it to report stronger earnings. The company’s debt position is quite significant which might have an impact on the free cash flows. The company has lowered its 2019 oil production guidance to 90,000 - 98,000 barrels per day from previous forecast oil production of 93,000-101,000 barrels of oil per day for the year mainly due to technical issues being experienced at the fields off the coast of Ghana. Based on the volatile market sentiments, heavy debt burden and macro headwinds, we recommend investors to keep a cautious Watch on the stock at the closing price of GBX 234.80 (as on 25th April 2019), while any correction with support from few catalysts needs to be evaluated at a later stage.

Premier Oil PLC

Premier Oil PLC (PMO) is a London, United Kingdom-based oil and gas production and exploration multinational. The group has a high-quality portfolio of the company which provides it with organic growth opportunities. The company has oil and gas interests in the Falkland Islands, the North Sea, Latin America, and South East Asia. As opposed to the 'downstream' refining and retail sector, the company is majorly engaged in the 'upstream' sector of the industry – the exploration and production segment (oil and gas). The company's operations are differentiated according to five geographical segments: the Falkland Islands, the United Kingdom, Vietnam, Indonesia, and the Rest of the World.

Key Financial Highlights (2018, in $m)

 (Source: Company Filings)

During the year, the operational delivery of the group remained strong as total revenue from continuing operations (excluding Pakistan) rose to $1,397.5 million from $1,043.1 million in 2017. Total revenue from all operations stood at $1,438 million against $1,102 million reported in 2017. In 2018, total operating costs at $16.9/boe were below the low end of $17- $18/boe guidance. Due to higher production and realised prices during the year, EBITDAX for 2018 from continuing operations surged by around 50 per cent to $882.3 million. Net Profit after tax was $133 million, rising from a loss of $254 million reported in 2017. This resulted in a basic EPS (continued and discontinued business operations) of 17.3 cents, versus a loss of 49.4 cents in 2017, reflecting an increase in sales revenue and the subsequent impact on operating profits. Helped by strong cash flow generation and the successful conversion of the group's convertible bond notes during the year, the company reduced its net debt by $393 million to $2.3 billion.

Valuation Methodology
Method: EV/Sales Multiple Approach (NTM)


Share Price Commentary

Daily Chart as at April-26-19, before the market closed (Source: Thomson Reuters)

On 26th April 2019, at the time of writing (before the market closed, at GMT 02:35 pm), PMO shares were trading at GBX 99.11, down by 5.4 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 146.90/GBX 54.70. The outstanding market capitalisation was around £862.10 million.

Conclusion
Since the company is focused on the upstream sector, the recent increase in oil prices might increase the cost of raw material, squeezing profit margins. However, Premier's forward hedging programmes will protect future cash flows, which coupled with a focus on operational delivery, will help to reduce cost and ensure capital discipline. This augurs well for the prospects of the company. The company has reduced its debt considerably and seeks to improve its leverage position further, helped by selective investment in new projects such as Tolmount, Sea Lion and Zama. Based on healthy prospects and supported by valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 104.90 (as on 25th April 2019) with low double-digit upside potential based on 2.17x NTM EV/Sales (approx.) on FY19E Sales.

*All forecasted figures and Peers information has been taken from Thomson Reuters.

*The buy recommendation is valid for the current price as covered in the report (as on April-26-19).

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