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Shell gets breathing space on the dividend (for now)

The market responded positively to Shell's full-year figures ahead of the completion of the merger with industry rival BG
February 4, 2016

In what promises to be a familiar refrain throughout the earnings season, Royal Dutch Shell (RDSB) reported an 80 per cent fall in replacement cost (CCS) earnings after enduring a full year of weak crude prices. However, investors enjoy nothing more than a good cull, so the Anglo-Dutch major’s share price was buoyed by confirmation that the combined Shell/BG entity will shed around 10,000 jobs, while group chief executive Ben van Beurden reiterated that dividends are expected to be “at least $1.88 per share in 2016”.

IC TIP: Buy at 1511p

Mr van Beurden and his management team have taken an axe to operating and capital budgets, the combined spend hacked back by $12.5bn (£8.6bn). But given anaemic near-term projections on crude prices, it’s nailed on that more cuts will follow. Debt levels remain manageable, and there’s more cash on the balance sheet. Operating cash flows, excluding working capital movements, though 37 per cent down on the 2014 figures, actually held up reasonably well. The challenge, of course, will be to free up additional cash flows if crude prices remain in the doldrums beyond the second quarter.

Shareholders can be grateful that, unlike some industry peers, the group didn’t hive off its refining assets earlier this decade. Shell’s downstream segment accounted for 91 per cent of adjusted CCS profits of $10.7bn, helped along by lower costs, favourable exchange rate effects and lower taxation. However, it’s conceivable that margins for this segment could contract because of the shrinking differential between Brent crude and WTI prices – lower WTI prices generally translate into improved US refining margins.

If you exclude the impact of divestments, production volumes increased slightly through the year. But as with industry rival BP (BP.), Shell’s focus on capital discipline is having a detrimental effect on reserves, as shown by a paltry average replacement ratio of 48 per cent over the past three years. Of course, the group is pressing ahead with the merger with BG Group (BG.), so the question of reserves expansion will have to be re-addressed subsequent to completion.

Prior to these figures, Canaccord Genuity expected adjusted 2016 EPS of 227¢ a share, up from 169¢ last year.

ROYAL DUTCH SHELL (RDSB)
ORD PRICE:1,511pMARKET VALUE:£ 97.6bn
TOUCH:1,510-1,512p12M HIGH / LOW:2,283p1,262p
DIVIDEND YIELD:8.5%PE RATIO:71
NET ASSET VALUE:2,533¢*NET DEBT:16%

Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201147055.7497168
201246750.5427172
201345133.6260180
201442128.3236188
20152652.0531.0188
% change-37-93-87-

Ex-div:18 Feb

Payment:29 Mar

*Reflects both 'A' and 'B' shares. £1 = $1.46