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Shell caps off tough 2020 with higher payout

The oil and gas giant recorded a historic loss as sales tumbled and write-offs hit the balance sheet
Shell caps off tough 2020 with higher payout
  • December earnings fell short of analyst expectations despite higher oil price
  • Shell increased its quarterly payout despite the Q4 and 2020 losses

In what could be the last annual results from Royal Dutch Shell (RDSB) as shareholders know it, the oil and gas giant raised its dividend even as Covid-19 recovery prospects remain uncertain. The company will announce how it will execute its plan to reach net zero on 11 February.

While changes similar to those announced by BP (BP.) last year are unlikely, Shell will still have to make significant progress if it is to get near its plans to cut carbon emissions. 

Its December quarter adjusted earnings were $393m (£288m), down a third on analyst forecasts and a fraction of the $2.9bn reported a year earlier. Production was also down a tenth year-on-year to 3.4m barrels of oil equivalent per day (boepd). 

Brent crude prices are close to $60 a barrel (bbl), steadily recovering from the post-crash low of under $10/bbl in April. 

Shell also made it into positive territory for its full year adjusted earnings, registering a $4.8bn profit. On a current-cost-of-supplies basis, which is similar to BP’s replacement cost profit, the major reported a loss of $19.9bn, one of its largest ever. Post-tax impairments were over $21bn, covering write-downs on the lower long-term oil price forecast, operational challenges and “onerous contract provisions”. 

At the same time, Shell’s full year underlying operating expenses came down 12 per cent versus 2019, to $32.5bn, and capital spending fell a quarter to $17.8bn. Finance chief Jessica Uhl put this down to works slowing or stopping entirely due to Covid-19 and home-working for its white-collar workers, which “stimulated a lot of innovation". 

Last year, Shell cut its dividend for the first time in over 70 years, and the overall 2020 payout of 65.3ȼ was two thirds below 2019. The March quarter dividend has been raised 4 per cent to 17.35ȼ, while shareholders will be paid out 16.65ȼ for the last three months in December. 

Chief executive Ben van Beurden said the board had set the new dividend level with the intention of increasing it by 4 per cent every year. The higher dividend has been signed off by the board but will be confirmed in April, with the release of the March quarter results. 

Net debt increased by around $2bn between the September and December quarters to $75.4bn, because of lower free cash flow and lease additions. 

Jefferies analyst Giacomo Romeo highlighted the 5 per cent miss on cash flow from operations compared to consensus forecasts, at $5.5bn, but said it was “not as bad as feared after BP”. 

Since the last week of January, BP, Exxon-Mobil (US:XOM) and Chevron (US:CVX) have all reported major losses. Exxon chief executive Darren Woods said 2021 “presented the most challenging market conditions ExxonMobil has ever experienced”. Conditions have improved in recent months and the energy majors’ shares are all trading strongly compared to the depths of 2020. 

Chevron and Exxon have also ramped up their green rhetoric this year, although have focused more on carbon capture and storage (CCS) than investing heavily in renewables like Shell, BP and Total (FR:FP). 

Asked about the split between the European approach of buying up renewables capacity and the US approach of investing more in abatement technology on Thursday’s analyst call, Mr van Beurden said Shell would not just be looking to sell green electricity. 

“A lot of the value [in renewables] is going to be harvested downstream as you create bespoke solutions for customers,” he said, calling it the “optimisation game”. 

Mr van Beurden has previously spoken of being an asset-light energy company and laid out a dramatically potential portfolio in 2050. “We will have some oil and gas in the mix of energy we sell by 2050, but it will be predominantly low-carbon electricity, low-carbon biofuels, it will be hydrogen and it will be all sorts of other solutions too,” he said last year

Increasing the dividend so soon after pruning it back shows confidence in much of the world's demand recovering from Covid-19 soon. Given the vaccine progress, this is possible. Now Shell has to convince investors it can get back to being highly profitable while also radically changing its business – that's far from a given. Sell. 

Last IC View: Sell, 891p, 29 Oct 2020

ROYAL DUTCH SHELL (RDSB)  
ORD PRICE:1,309pMARKET VALUE:£ 102bn
TOUCH:1,308-1,310p12-MONTH HIGH:2,051pLOW: 878p
DIVIDEND YIELD:3.6%PE RATIO:NA
NET ASSET VALUE:2,037p*NET DEBT:48%
Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (ȼ)Dividend per share (ȼ)
20162345.658188
201730518.1158188
201839635.6282188
201935225.5197188
2020183-27.0-27865.3
% change-48---65
Ex-div:18 Feb   
Payment:29 Mar   
£1=$1.37