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As long as the price of oil is in free fall, there will be blood in the streets in the oil sector.
RDS.b at 14% yield now.
Believeable
RDS.b approaching a 9% yield. Unbelievable.
Averaging in at various prices will probably look smart in six months.
Great post, Conix. Appreciate the link very much.
Appreciate your capsule, tech analysis charts.
Royal Dutch Shell: No Need To Worry Over Proven Reserve Life And Dividend Remains Safe Despite Soft Fourth Quarter Results
Feb. 5, 2020
Summary
Unfortunately for shareholders in Royal Dutch Shell, results for the fourth quarter of 2019 were quite soft and thus saw their share price sink near 5% at one point.
Although their shrinking reserve life is not an ideal situation, there are two main reasons why this is not as concerning as it may initially appear.
Management is taking sensible actions with their capital allocation through keep capital expenditure low and slowing their share buybacks.
These steps should help ensure their cherished dividend payments continue well into the future, although their prospects for future dividend growth is minimal at the moment.
Introduction
Recently the European oil and gas giant, Royal Dutch Shell (RDS.A) (RDS.B), reported results for the fourth quarter of 2019. Unfortunately for shareholders these results saw net income fall 83% year on year and thus were not received particularly well by the market, sending the share price down nearly 5% at one point. This article provides my commentary on several key topics and the outlook for shareholder returns.
Reserve Life
One concerning aspect that has been mentioned was their sixth consecutive decline in their proven oil and gas reserve life, which now stands at only approximately eight years. Whilst this is certainly not an ideal situation, there are a couple of reasons why it is not as alarming as stating that their “…status quo on reserves would put it out of business in eight years” indicates.
The first reason being that this assumes a zero reserve replacement ratio, which history indicates is very unlikely to eventuate. During the last three years their reserve replacement ratio has on average been 48% or 90% if the impacts of acquisitions and divestitures are excluded. If an investor assumes the lower reserve replacement ratio of 48% will continue going forward, this indicates that their reserves would actually last approximately twice as long. Naturally the thought of their reserves actually lasting sixteen years does not sound nearly as alarming and thus indicates they have considerably more time to address this issue. Whilst their future reserve replacement ratio may differ, considering this occurred during a period of industry wide reduced exploration expenditure and was heavily impacted by divestitures, it seems realistic to assume that this could continue at least in the medium-term.
Personally I believe their reserve replacement ratio that excludes the impacts of acquisitions and divestitures is a more suitable way to view their performance as inorganic decisions such as these can work in either direction, which leads into the second reason. Providing they maintain a strong financial position and thus access to capital markets they should be able to acquire reserves in the future as necessary or alternatively further diversify their earnings into other areas, such as renewable energy.
Cash Flows, Capital Expenditure Guidance & Dividend Coverage
Although the headline figures indicating that their operating cash flow decreased from $22.021b in the fourth quarter of 2018 to only $10.267b for the equivalent time period of 2019 sounds dramatic on the surface, the underlying situation was not nearly as severe. If the impacts of working capital changes are removed from both results, their operating cash flow only decreased slightly from $12.9b to $12.3b.
Considering the pressure they are currently facing from not only weak oil and gas prices but also downstream margins, it was reassuring to see capital expenditure guidance towards the lower end of their $24b to $29b range. This is a positive indicator for their capital allocation as it should strike an appropriate balance between ensuring their financial position remains healthy without underinvesting in their future.
Their dividend coverage for the fourth quarter of 2019 was not particularly strong with their operating cash flow of $10.267b only leaving $2.307b for dividends after paying for capital expenditure, investments in joint ventures and associates, net interest expense and dividends to non-controlling interests. This only provided dividend coverage of 61.93% as their dividend payments of $3.725b left a shortfall of $1.418b, however, due to divestitures totaling $2.081b this shortfall was not funded through debt. Whilst this quarter was not stellar, I still maintain that their dividend remains safe as was further discussed in one of my previous articles. Nevertheless their share buybacks totaling $2.848b where clearly partly funded through debt, which as subsequently discussed are being reduced in the short-term.
Future Buyback Outlook
The next tranche of their share buybacks to is be completed by the 27th April 2020 and will not exceed $1b, which is significantly less than the $2.848b that were repurchased during the fourth quarter of 2019. When considering the current macroeconomic backdrop it should come as little surprise that they are slowing the pace of their share buybacks. This indicates that management is making sensible capital allocation decisions that should help ensure their financial position remains secure and thus their cherished dividend payments continue flowing even if times get tougher.
Future Dividend Outlook
Given the current gloomy situation for their underlying commodities as well as their desire to further deleverage and complete their share buyback program, it seems safe to assume that their dividend will be remaining static for a while longer. Considering their dividend yield sits at virtually 7% as of the time of writing, this is not necessarily problematic as going forward shareholders can theoretically still earn a modest return in this low interest rate world even if their share price only trends sideways.
Conclusion
The softness of their earnings should have been mostly expected given the underlying industry conditions that they unfortunately have zero control over. Thankfully it appears that their management is making sensible capital allocation decisions to ensure their core business and cherished dividend payments continue well into the future. Although as a shareholder I would naturally prefer to see stronger results, volatility is par for the course in this industry and thus nothing contained within these results causes me to alter my bullish rating.
Exxon, Chevron results augur tough year ahead, shares drop 3%
HOUSTON, Jan 31 (Reuters) - Weaker crude oil and gas prices drove quarterly results sharply lower at Exxon Mobil Corp and Chevron Corp, pushing down shares at the two largest U.S. oil producers and signaling a weak start to the new year.
While one-time asset sales or write downs were large factors, the two companies said earnings suffered from weaker margins in crude oil, chemicals and fuel production. They gave tepid outlooks for the near term.
Shares of Exxon and Chevron were both at least 3% lower in morning trade on the results and worries about slowing global economic growth.
Fourth-quarter results at Exxon fell below Wall Street’s recently lowered estimate, with earnings sliding to $5.6 billion from $6 billion a year ago. Per share profit excluding one-time gain from asset sales was 41 cents, below Wall Street’s estimate of 43 cents and 71 cents prior to a recent warning.
Chevron swung to a loss of $6.61 billion from a year-earlier profit of $3.73 billion. The company had $10 billion in charges including writedowns on the value of oil and gas properties that were no longer economic to pump. Excluding charges, its $1.49 cent a share profit topped estimates.
This week, Royal Dutch Shell’s shares hit a three-year low after it laid out a plan to pull back on share buybacks amid slower global growth and weak commodity prices.
Exxon CEO Darren Woods said its natural gas, refining and chemicals businesses have suffered from prices near or at decade lows. Exxon will keep investing in new projects on the belief that a growing global middle class will drive demand for its products, Woods said, describing the margin weakness as “a short-term impact.”
Exxon and Chevron are racing in the Permian Basin, the top U.S. shale field, to reach 1 million barrels per day of production, but neither is anywhere near that level right now.
Exxons output rose 54% from a year ago to around 294,000 barrels of oil and gas daily, while Chevron is pumping 514,000 barrels daily, up 36% in a year. Both companies have a goal of 1 million bpd within a few years.
Values are down across the oil and gas sector, prompting ongoing speculation that large companies will acquire smaller ones in the Permian Basin. Woods, though, said that the best opportunities are usually the ones that you can generate organically, while Chevron CEO Mike Wirth repeated a pledge to maintain capital discipline.
(Reporting by Jennifer Hiller and Gary McWilliams; Editing by David Gregorio)
Shell to slow pace of share buyback program as profit slammed
Jan. 30, 2020 7:58 AM ET|About: Royal Dutch Shell plc (RDS.A)|By: Carl Surran, SA News Editor
Royal Dutch Shell (RDS.A, RDS.B) -3.3% pre-market and falling in London to the lowest in nearly three years after Q4 profit was cut in half from the prior-year quarter and the company said it would slow the pace of spending on its $25B stock buyback program.
CEO Ben van Beurden says Shell probably will miss its target of buying back $25B of shares by the end of 2020 if macroeconomic conditions do not approve; Shell currently is ~$10B short of the goal.
Shell reports Q4 net income adjusted for cost of supply fell to $2.9B from $5.7B, net profit attributable to shareholders tumbled to $965M from $5.6B, free cash flow sank to $5.4B from $16.7B, and total revenues fell 18% to $84B.
Shell executives said that if energy prices remain weak and refinery and chemicals margins stayed at current levels through 2020, cash flows could suffer another $7B-$10B hit.
Q4 gearing rose to 29.3% from 27.9%, and CEO Ben van Beurden says the figure likely will remain above its 25% target this year.
Earnings at Shell's gas business fell 47% Y/Y to $1.9B after higher trading activity failed to offset lower prices.
The exploration and production division reported a Q4 loss of $787M vs. a profit of $1.6B in the year-ago quarter due to lower oil prices and decommissioning costs; Q4 production of 2.8M boe was in line with the prior-year period.
Q4 earnings at Shell's downstream refining and chemicals business sank 64% to just ~$1B as weaker margins hurt profits.
Well--I was wrong. Under $55.
But the company will now be getting a great price during their continuing buyback
Shell announces the next tranche of the share buyback programme
January 30, 2020
Royal Dutch Shell plc (the ‘company’) today announces the commencement of trading in the next tranche of its share buyback programme previously announced on July 26, 2018. In the next tranche, the company has entered into an irrevocable, non-discretionary arrangement with a broker to enable the purchase of A ordinary shares and/or B ordinary shares for a period up to and including April 27, 2020. The aggregate maximum consideration for the purchase of A ordinary shares and/or B ordinary shares under the next tranche is $1.0 billion. The company’s intention remains to buy back at least $25 billion of its shares, but the pace remains subject to macro conditions and further debt reduction.
On January 22, 2020 the company completed the previous tranche of its share buyback programme. In aggregate between July 26, 2018 and January 22, 2020, the company repurchased 484,534,678 ordinary shares for an aggregate consideration of $14.75 billion (the ‘aggregate previous tranches’).
The maximum number of ordinary shares which may be purchased by the company under the next tranche of its share buyback programme (the ‘next tranche’) is 624,326,942, which is the maximum pursuant to the authority granted by shareholders at the company's 2019 Annual General Meeting1 minus the number of ordinary shares purchased in the previous two tranches. The shares bought back under the next tranche will be the A ordinary shares traded in the EUR denomination and whichever of the A ordinary shares and/or B ordinary shares traded in the GBP denomination is economically the least expensive on a given trading day.
The broker will make its trading decisions in relation to the company's securities independently of the company. The next tranche will be carried out on the London Stock Exchange and/or on BATS and/or on Chi-X and will be effected within certain pre-set parameters. It will be conducted in accordance with the company's general authority to repurchase shares granted by its shareholders at the company’s Annual General Meeting held on May 21, 20191, and in line with Chapter 12 of the Listing Rules, Article 5 of the Market Abuse Regulation 596/2014/EU dealing with buyback programmes and the Commission Delegated Regulation (EU) 2016/1052.
The purpose of the next tranche is to reduce the issued share capital of the company to offset the number of shares issued under the Scrip Dividend Programme and, in combination with the other tranches of the share buyback programme, to significantly reduce the equity issued in connection with the company’s combination with BG Group. All shares repurchased as part of the next tranche will be cancelled.
Any further tranches of the buyback programme, which may be conducted after completion of the tranche announced today, will be announced in due course.
Shell sees $2.3B charges, cuts output estimate
Dec. 20, 2019 4:00 AM ET|About: Royal Dutch Shell plc (RDS.A)|By: Yoel Minkoff, SA News Editor
Trimming its forecast for quarterly oil production sales, Royal Dutch Shell (RDS.A, RDS.B) sees impairment charges of up to $2.3B in the fourth quarter, based on the macroeconomic outlook.
2019 capital expenditure is also expected to be at the lower end of the company's guidance range of $24B to $29B.
Last week, Chevron said it expects to write down as much as $11B for assets including shale-gas holdings in the U.S., with natural gas prices on course for the lowest annual average in two decades.
Getting close to that $55 level again.
Bet we never see that $55 again
Cowen cuts rating on Royal Dutch Shell
Lower natural gas prices to blame
In and ready for some dividends. Oil prices are on the rise so IMO shell is a great buy
Same here, I like what I see.
Not much movement recently. I am long on this one and reinvest the dividends.
Tripled earning report today. Stock should go higher now. I am in for the long term RDS.A & B
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