Interactive Investor

Shell in demand as dividend confirmed

30th July 2015 11:36

Lee Wild from interactive investor

There's lots to like about Royal Dutch Shell's second-quarter results. They beat expectations for a start, and the oil major has identified further cost savings as part of its £47 billion purchase of BG Group. There's a commitment to "at least" match this year's $1.88 a share dividend in 2016, too, giving a prospective yield of close to 7%.

Strip out disposal profits, impairments and other one-off items and Shell made $3.8 billion on a current cost of supplies (CCS) basis in the three months ended June. That's down 37% on the $6.1 billion it banked a year ago, but still better than the $3.2 billion pencilled in by City analysts.

Clearly, upstream earnings - exploration and production - were hammered by the slump in oil prices which halved in the final six months of 2014. Planned maintenance took out production, too, and output fell by 11% to 2.73 million barrels of oil equivalent per day. Both costs and depreciation were lower, but upstream profit still plunged from $4.7 billion to $1 billion.

Downstream, however, did much better. Profit more than doubled to almost $3 billion during the quarter, driven by lower costs and higher realised refining margins.

Elsewhere, Shell chiefs admit that despite a likely return to $70-$90 oil in the medium-term, the price downturn could last for "several years" yet. That means getting the business in shape, and is why operating costs will fall by over $4 billion, or 10%, this year, with more cuts planned for 2016. Around 6,500 jobs will go by this year-end, and capital investment has been reduced by another tenth to $30 billion. That's 35% lower than in 2013. It will be $35 billion when the BG acquisition completes early next year, $5 billion less than previous guidance.

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Asset sales for last year and 2015 should also bring in around $20 billion - Shell today said it had sold a 33% stake in Showa Shell Sekiyu KK for $1.4 billion. And expect another $30 billion of disposals in the two years after the BG acquisition. That will bankroll a return of "at least" $25 billion to shareholders via share buy-backs between 2017 and 2020.

It also means the dividend is safe, although the chance of a cut here was next to zero. Shell afterall is one of the oil industry's most reliable dividend payers. It hasn't cut the payout since World War II and total dividends have shown compound growth of 5% since 1989. Its healthy balance sheet underpins the payout even during lean times.

Deutsche Bank remains a fan. It predicts a sharp uptick in earnings per share (EPS) after this year's slump. Up 3.6% to 1,840p Thursday, Shell trades on a forward price/earnings (P/E) ratio of about 12.5, dropping to 10 on 2016 estimates. That's a deep discount to both BP and the other European oil majors, especially for a share currently yielding 6.6%. Deutsche says 'buy' with price target of 2,425p.

Industry expert Malcolm Graham-Wood is similarly bullish. "Shell says that it will remain prudent through the downturn with the capacity to pay 'attractive' dividends to shareholders over the long term. As I have said before recently, despite the sector being out of favour and recent performance by Shell to be dire, I would be adding to holdings at these levels on a long term view supported by a yield well over 6%."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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