The Anglo–Dutch multinational oil and gas giant, Royal Dutch Shell PLC (RDSB, Financial), more commonly known as Shell, has just announced a few days back that it would be cutting its investments drastically to cope up with the crash in the crude oil prices over a span of three years. This has raised several eyebrows from the investor community who don’t feel the security in holding the Shell stock any longer. Also the fourth quarter results were pretty down, having missed major forecasts.
Even their CEO, Ben Van Beurden stated – “We see pressure on our investment program… It’s a game of being prudent but at the same time not overreacting.” In such a scenario let’s dive into the financial playbook of the oil major to assess whether it’s a good investment option for the long term investors.
Looking into the quarter results
Profit, not including one-time items and inventory changes increased from $2.9 billion in the previous year to $3.3 billion in the fourth quarter of 2014. For the full year of 2014, the current-cost-of-supplies profit hiked up from $19.5 billion in 2013 to $22.6 billion in 2014. However, the profit missed the $4.1 billion average of 13 analysts complied by Bloomberg. Soon after the earnings release, Shell’s shares plunged 4.3% in London, the biggest decline since October 31, 2013.
As the quarter results remained dismal with upstream earnings at $1.7 billion, below Morgan Stanley analysts’ consensus estimate of $2.8 billion and integrated gas accounting for $1.6 billion of this profit reflecting the pressure building up from other upstream activities showing almost no earnings, the management has been coerced to announce a $15 billion cut in investment over the coming three years to help it weather the storm from the present plunge in oil prices. The recent fall in crude oil price has spelled havoc on the company’s future prospects and has led to the profits lagging behind the Street estimate by more than 20%.
However, the iconic item in the earnings report was that Shell would pay the same quarterly dividend of $0.47 a share and this can be said to be a rare move having pledged to pay the same amount in the first quarter of 2015. In the oil major’s history, since 1945 it has never been heard to cut on its dividend pay-out to the investors.
The larger picture looks promising though
A slump in earnings for Shell from the upstream part of the business of pumping oil and gas in the fourth quarter was levelled by the fact that it did well in the refining and trading division where the earnings almost tripled to $1.55 billion. In fact, analysts are of the opinion that Shell is the only large oil company that would report a gain in fourth-quarter profit among the top four oil majors.
The best part with Shell is that though it plans to reduce investment spending which would include deferring projects through 2017, the Anglo-Dutch oil giant is trying hard to lower downward pressure on dividends by focussing more on shareholder returns. And maybe that’s a major reason behind the decision taken to curb its investments for the next three long years.
Noteworthy is that Shell’s CEO is still optimistic on oil prices reaching a “long-term equilibrium” of $90 per barrel once again after the recent dramatic fall, but he did not allocate a timeline for the upward journey of oil prices. To keep its fundamentals strong, Shell has maintained a low borrowing ratio of 12% at the end of 2014 that leaves more room to raise debt and thus it stands as a strong contender even with crude oil prices entering new level of lows.
Final word
Currently the company is facing several headwinds and is thus deferring or cancelling almost 40 projects to maintain its bottom line at a decent level, irrespective of the slump in crude to a five-year low. The future prospects might not seem promising at the first glance, but detailed fundamental study of the financial position of Shell does reflect that the oil major still has strategies in place to generate cash flow to pay its investors and keep them happy even when the macro-environment is not that favourable for oil exploration. If an investor wants to invest for the long term, Shell might be a good option to invest in at this juncture as its price is now lower than expected and when such economic headwinds would get wiped off it would surely get the highs as well.
