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Shell's painful legacy

Third-quarter numbers for Shell were hit by £5.1bn in writedowns, as the group cast off uneconomic legacy projects
November 2, 2015

Third-quarter (Q3) profit figures from Royal Dutch Shell (RDSB) were overshadowed by $7.9bn (£5.1bn) in writedowns, including charges linked to the abandonment of the Carmon Creek oil-sands project in Western Canada and the recent cessation of drilling activity in Alaska. Strip out one-off items, adjust for inventory changes, and Shell turned in profit of $1.77bn for the quarter - a 70 per cent decline from the corresponding period in 2014.

IC TIP: Buy at 1692p

What's new...

■ Abandonment of the Carmon Creek oil-sands project

■ Cessation of drilling activity in Alaska

■ Third-quarter trading figures

 

The oil price slump has obviously taken its toll, but there was some solace for investors as the negative financial impact was partly cushioned through improved production volumes, a tighter rein on costs and the performance of Shell's downstream segment, which continues to benefit from higher realised refining margins.

The group maintains that it has been able to cover its dividend commitments with Brent crude averaging $60 a barrel; a view supported by a relatively modest 12 per cent fall in comparable third-quarter operating cash flows. However, that relative decline balloons out to 52 per cent when you disregard working capital movements. The good news is that gearing remains manageable at 12.7 per cent, so we think that Shell is well-placed to meet near-term commitments, although the potential for oil price volatility renders predictions beyond 2016 speculative at best.

The bid for BG (BG.) is moving ahead on the regulatory front, although some investors worry that the deal could ultimately prove dilutive if oil prices remain in the doldrums. Separately, BG revealed a 37 per cent fall in Q3 underlying profit, but it also announced a substantial step-up in full-year production guidance - just the tonic for Shell's chief executive Ben van Beurden.

 

Deutsche Bank says...

Buy. Shell's adjusted Q3 was worse than market expectations, reflecting a very weak performance in Shell's upstream activities where the loss of $400m was decidedly worse than the break-even consensus had anticipated. Operating cash flow was $11.3bn, reflecting large working capital inflows ($5.9bn), with the capital expenditure run rate below guidance at $28bn. Overall, the statement emphasises the moves now being taken to reposition the portfolio for a lower oil price environment. The shares trade with a 7.3 per cent yield, against an average rate of 6.5 per cent for the majors.

 

Macquarie Research says...

Outperform. In upstream, in spite of a decent total production number (2,880 barrels/day, up 5 per cent quarter on quarter), certain areas of the business provided a disappointing contribution: Americas generated a $425m loss while integrated gas contribution was down 42 per cent. Adjusted income from oil products and chemicals were also lower than expected. Macquarie gives a discounted cash flow valuation of £21.78 a share, and predicts adjusted full-year profit of $14.1bn and EPS of $2.23, against $22.8bn and $3.62 for 2014.