Royal Dutch Shell PLC

Royal Dutch Shell PLC (LON: RDSA) is operating as a petrochemical and energy company which is involved in the exploring, producing, refining and marketing of oil and natural gas, with over 83,000 employees in over 70 countries.

On 30^th April 2020, Shell will release its Q1 FY2020 results along with dividend announcement.

Recent News
On 23^rd March 2020, Shell ensured that they are continually taking necessary recovery measures and action to reinforce financial strength and business functioning, caused by COVID-19 contagion.

Financial Highlights – Financial year 2019 (31st December 2019, USD, million)

(Source: Annual Report, Company Website)

For the financial year ending 31st December 2019, underperforming integrated gas and downstream segments led the revenue decline to USD 344,877 million from USD 388,379 million in FY2018. In FY2019, the PBT (Profit before tax) stood at USD 25,485 million versus USD 35,621 million in FY2018. The net income (attributable to shareholders) stood at USD 15,842 million in FY2019 versus USD 23,352 million in FY2018. The basic earnings per share declined to USD 1.97 in FY2019 from USD 2.82 in FY2018. The plunge in financial items was primarily incurred due to challenging macroeconomic conditions and falling oil and gas prices. The global economic slowdown has also impacted the USD 25 billion share buyback programme; however, the Group is firm about achieving the target.

Share Price Performance
 
Daily Chart as of March 23^rd, 2020, before the market close (Source: Thomson Reuters)

Royal Dutch Shell Group’s shares were trading at GBX 1,036.6 at the time of writing before the market close (at 8.40 AM GMT) on 23^rd March 2020 and down by 2.41% versus the previous day closing price. Stock's 52 weeks High is GBX 2,811.38 and Low is GBX 946.10.

From the technical standpoint, 3 days, 9 days and 14 days relative strength index of the stock was favourable (oversold) and prices would rise further from the current trading level.

Valuation Methodology


*1 USD = 0.854937 GBP
Growth Catalyst
Going forward in the long run, the IMF’s global economic outlook shows improvement in major economic parameters, which eventually would support the growth of oil demand.

With the advent of climate change, demand for cleaner energy is on the rise, Shell is continuously investing in generating power from natural gas and renewable sources. Furthermore, the growing population and demand for a better quality of life, shall increase the need of energy requirement.

Conclusion
During the financial year 2019, Shell’s cash flow from operating activities was robust compared to their industry peers, at USD 42.2 billion. They have distributed over USD 25 billion to shareholders either through the dividend or share buyback programme.

However, with COVID-19 outbreak, there could be macro-economic fluctuations regarding prices and demand for oil, gas and products.

Moreover, recent (in March) uncertainty in oil supply have caused volatility in commodity markets, which can affect the earnings and profitability of the Company. The average price of Brent crude oil was 10% ($7/b) in FY2019 vs FY2018. The Saudi-led price war can further diminish the industry sentiments.

Over 4 years (FY15 - FY19), the company’s revenue surged from USD 264,960 million in FY15 to USD 344,877 million in FY19. Compounded annual growth rate (CAGR) stood at 6.81 per cent.

Based on the above rationale and supported by valuation done using the above method, we have given a "BUY" recommendation at the current price of GBX 1,027.60 (as on 23rd March 2020, before the market close at 8.24 AM GMT) with lower double-digit upside potential based on 9.1x NTM Price/Earnings multiple (approx.) on FY20E Earnings per share (approx.).
 
*All forecasted figures and peer information have been taken from Thomson Reuters.

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