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With the price of Brent crude oil having risen to around $76 (£49) a barrel from $67 a year ago, it’s not surprising that Royal Dutch Shell reported a decent earnings hike at the half-year stage. Using the industry-standard "current cost of supply" (CCS) metric, which strips out inventory gains and losses, earnings grew an impressive 67 per cent to $9.43bn Total production rose 6 per cent in the period to 3.35m barrels of oil equivalent per day - with natural gas production up 12 per cent and crude oil production up 1 per cent.
But there's rather more going on at Shell than just increased production and a higher oil price. Earnings, for instance, have been helped along by the successful completion of the group's so-called Transition 2009 programme – that delivered an underlying $3.5bn of cost savings, which exceeded the original target by around 15 per cent.
Management is now focusing on capital efficiency and plans to divest assets worth $7bn-$8bn in the period to 2010-11. Analysts at broker Collins Stewart reckon that programme can be pushed through without hitting the group's prodigious cash flow - management wants to grow cash flow by 80 per cent between 2009 and 2012. The group's performance on that score already looks impressive as operating cash flow grew 52 per cent year-on-year, to $12.9bn.
Even the group's downstream operations are looking healthier and second quarter CCS earnings there reached $1.47bn after a $275m loss in 2009. That reflected higher oil products marketing earnings, improved refining contributions and "significantly" better chemicals earnings.
Collins Stewart expects full-year adjusted EPS of 185.7p (45.3p: 2009), rising to 230.5p in 2011.
ROYAL DUTCH SHELL (RDSB) |
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|---|---|---|---|---|
| ORD PRICE: | 1,716p | MARKET VALUE: | £110bn* | |
| TOUCH: | 1,716-1717p | 12-MONTH HIGH: | 1,998p | LOW:1,505p |
| DIVIDEND YIELD: | 6.3% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 2203c* | NET DEBT: | 20% | |
| Half-year to 30 Jun | Turnover ($bn) | Pretax profit ($bn) | Earnings per share (c) | Net div per share (c) |
|---|---|---|---|---|
| 2009 | 122 | 11.6 | 119 | 84.0 |
| 2010 | 177 | 18.7 | 161 | 84.0 |
| % change | +45 | +61 | +35 | - |
Ex-div:04 Aug Payment:08 Sep *Reflects both 'A' and 'B' shares £1=$1.56 |
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Shell's results offered a spectacular contrast to struggling rival BP - which was hammered by a $32bn charge for its Gulf of Mexico well disaster. The yield looks tasty and the oil price continues to look fairly firm. Still, caution is needed. Any serious long-term US clampdown on offshore drilling will certainly hit Shell's Gulf operations. Also, chief executive Peter Voser pointed to "mixed signals in the global economy" and an outlook that "remains uncertain". So, after slipping 14 per cent since April's high point, the shares look up with events. Fairly priced.
Last IC View: Fairly priced, 1,872p, 17 March 2010
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