What's new
■ Strong liquefied natural gas sales
■ Lower quarterly drilling write-offs
■ New chairman appointed
Royal Dutch Shell’s (RDSB) liquefied natural gas (LNG) business was the standout performer at the third-quarter stage. It's also clear that cost-cutting programmes implemented by chief executive Ben van Beurden are beginning to have the desired effect. The Anglo-Dutch giant revealed that comparative quarterly earnings - excluding one-time items and inventory changes - grew nearly a third to $5.8bn (£3.6bn).
A weakening oil price did mean that Shell received around $8 less for every barrel of oil it sold compared to 2013's third quarter. But the slide in the price of crude oil was partially offset by a 16 per cent increase in LNG sales through the quarter. In fact, Shell is starting to profit handsomely from the $40bn or so that it has invested in big LNG projects to meet burgeoning Asian demand. The figures benefited from new production having kicked in from higher-margin regions, too, such as the Gulf of Mexico. The group also booked fewer write-offs on dry holes than it did during the third quarter of 2013.
Deutsche Bank says...
Buy. Another quarter, another set of above consensus results. Balance sheet strength and momentum on costs suggests that Shell is very well placed to withstand a sustained fall in the oil price. Net income was comfortably ahead of expectations with operating cash flow - at $11.1bn - similarly advanced. Of the European super-majors, Shell remains very much the 'sleep at night' stock - nothing wrong with that. Our buy stance, which assumes an average oil price of $103 per barrel of oil in 2015, is predicated on the robustness of Shell's cash flows, the potential for greater returns on capital employed, and the group's cost focus. Expects EPS of 394¢ for 2014, with a 188¢ dividend.
Investec Securities says...
Hold. Our call with management focused on the well-worn theme of this results season: the lower oil price. In 2014 every $10 fall in the price of a barrel of Brent crude will hit Shell’s earnings and cashflow by around $3.2bn - a bigger hit is likely in 2015. Despite renewed vigour on operating costs, however, Shell’s management is loath to cut capital expenditure. It sees growth in assets of 6-7 per cent per year and aims to increase the return on average capital employed by a few percentage points. But this combination implies underlying double-digit growth in earnings and dividends. For Shell, this just feels a bit too punchy for us. The shares trade on a 2014-15 average PE ratio of 9.8 time, representing a 12 per cent discount to the sector.
