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Shell gets working capital boost

Fourth quarter results for the oil major came in ahead of analyst forecasts
January 31, 2019

For such a slow-moving, closely watched company (whose earnings are largely driven by readily-available price information), Royal Dutch Shell (RDSB) posted a surprisingly strong set of results for 2018. Despite a slump in crude prices between October and December, fourth-quarter earnings on the current cost of supplies basis came in at $7.3bn (£5.6bn). That was 8 per cent above market consensus forecasts, and meant shareholder earnings doubled year on year to $23.8bn.

IC TIP: Hold at 2,370p

Cash flow from operating activities was even stronger, and benefited from a massive $9.1bn positive movement in working capital in the final quarter. Shell said this was due to a fall in oil prices and lower inventory levels, although investors will still welcome the effect on net debt, which at $51.4bn is now at the group’s gearing target.

In all of this, the sacrifice has been conventional assets. The reserves replacement ratio – which measures oil and gas additions against production – fell to 53 per cent for the year. In another era, this might look like a worry, but chimes with our previous observation (and hope) that the oil major’s hydrocarbon output has probably gone ex-growth.

Central to that strategy is Shell’s colossal $25bn share buyback programme, of which $4.5bn is now complete. Another $2.5bn of repurchases has been guaranteed by 29 April, and that’s not all for income seekers: though the fourth-quarter distribution was unchanged at 47¢ a share, Shell broke from convention by choosing not to pre-announce the payout for the current quarter. Investors can draw their own conclusions as to whether this implies dividends could soon rise for the first time since 2013, though we would caution against hopes of progressive returns.

That is unless we are given a clearer idea of growth prospects in the new energies business. We got a glimpse of this pivot earlier this month, when Shell and Dutch pension fund manager PGGM announced their interest in sustainable energy firm Eneco, whose municipal shareholders have put the group up for auction. A mooted €3bn price tag would make Eneco one of Shell’s biggest non-fossil fuel investments, if a fraction of the $25bn-$30bn annual capital budget.

HSBC, which expects Brent crude to average of $64 a barrel and a rise in refining margins in 2019, forecasts full-year pre-tax profits of $33.5bn and adjusted earnings per share of $2.79 (from $34.3bn and $2.55 per share in 2018).

ROYAL DUTCH SHELL (RDSB)  
ORD PRICE:2,370pMARKET VALUE:£ 194bn
TOUCH:2,369-2,370p12-MONTH HIGH:2,845pLOW: 2,194p
DIVIDEND YIELD:6.0%PE RATIO:11
NET ASSET VALUE:2,423¢*NET DEBT:25%
Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201442128.3236188
20152652.031188
20162345.658188
201730518.1158188
201838835.6282188
% change+27+96+78-
Ex-div:14 Feb   
Payment:25 Mar   
£1=$1.31. *Reflects both 'A' and 'B' shares.