Royal Dutch Shell PLC (LON: RDSA)

Royal Dutch Shell Plc is an FTSE 100 listed Petrochemical and Energy Company that is involved in the exploring, producing, refining, and marketing of oil and natural gas. The Integrated Gas segment is engaged in activities related to liquefied natural gas and the conversion of natural gas into gas-to-liquid fuels and other products. The Downstream segment is involved in manufacturing, marketing, and trading activities of oil products and chemicals that convert crude oil and other feedstock into a range of products. These products are transported and delivered around the world and used for domestic, industrial and transport purposes. The Upstream segment combines the Upstream and Oil Sands segments.

On 29 July 2021, RDSA would announce its Q2 FY2021 results.

Recent trend of dividend payments

 (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by RDSA from FY2016 to FY2020. In FY2021, RDSA paid an interim dividend of USD 0.1735 per share on 21 June 2021. The next dividend of FY2021 is expected to be USD 0.1735 per share and would be paid on 20 September 2021 (interim dividend). It would have an ex-dividend date of 12 August 2021.

Growth Prospects

• Sector leading cash generation: Driven by its strong operational and financial performance, RDSA generated sector-leading cash over the last four years. It has also reduced its net debt significantly. Hence, it could allocate significant capital to key projects, driving its growth.
• New agreement with Deutsche Telekom: The Company recently made a new agreement with Deutsche Telekom to advance digital innovation to accelerate transitions to net-zero emissions. This long term collaboration would benefit the environment and could drive RDSA’s growth.
• The proposed CCS facility in Alberta: To decarbonise its operations, the Company recently announced its intention to build a large-scale carbon capture and storage (CCS) project in Alberta. It would project the Company as a leading player in a low-carbon future.
• Acquisition of Ubitricity: The Company acquired Ubitricity, the leading on-street charging network in the UK. Ubitricity was operating around 75,000 charging points to tackle carbon emissions.
• Impending economic recovery: Countries and sectors are gradually opening up again, driven by the rollout of vaccination programmes. Hence, rising demand for oil could drive the growth for RDSA and petroleum companies in general.

Key Risks 

• Volatility in oil and gas prices: Due to regulatory battles and supply issues, oil and gas prices are very volatile in nature. Hence, muted prices of oil and gas could affect the margins of the Company.
• Increased cost of compliance: There have been regulatory changes in the oil and gas industry. Tighter environmental and safety guidelines require massive investment from the industry players. These massive investments could impact the liquidity of an industry player.
• Failure to find reserves: An inability to find further reserves and expand current reserves could dent a company’s future operations.
• Geological barriers: Exploration in less friendly environments leads to more difficulty in extraction and also time and cost overruns for a company. It could affect the margins of a company significantly.
• OPEC Stalemate: Due to political issues concerning the OPEC nations, there could be a stalemate in the production of oil and gas. Also, there could be a sudden jump in production as well. These events lead to high uncertainty in the oil and gas industry.
  

Now we will analyse some key fundamental and shareholders statistics of Royal Dutch Shell PLC.

Recent Development

Sale of minority shareholding: On 8 July 2021, the Company announced that it would sell its 37.5% shareholding in the Germany PCK Schwedt Refinery to Alcmene GmbH.

Q2 FY2021 Update (released on 7 July 2021)

• In the integrated gas segment, RDSA expects production volume between 900 and 960 thousand barrels of oil equivalent per day and an underlying operating expenditure USD 400 million to USD 500 million lower than that in Q1 FY2021.
• In the upstream segment, RDSA expects production volume between 2,225 and 2,300 thousand barrels of oil equivalent per day.
• In the oil products segment, the Company anticipates sales volumes to be between 4,000 and 5,000 thousand barrels per day.
• In the chemicals segment, RDSA expects production volume between 3,500 and 3,800 thousand tonnes and margins in line with Q1 FY2021.
• Driven by improved macroeconomic outlook and solid operational and financial delivery, RDSA would move to its next phase of capital allocation and dividend distribution, starting from the Q2 FY2021 results announcement.
  

Financial and Operational Highlights (for three months ended 31 March 2021 as of 29 April 2021)

(Source: LSE Website)

• RDSA had delivered significant growth of around 724% in adjusted earnings to USD 3.23 billion during Q1 FY2021 as compared to Q4 FY2020. Also, it exceeded USD 2.86 billion achieved in Q1 FY2020.
• Higher realised oil and LNG prices, chemicals, and refining margins drove the growth in adjusted earnings.
• Due to its cash-accretive operations, RDSA achieved a ~32% QoQ surge in cash flow from operating activities in Q1 FY2021.
• Driven by free cash flow generation in Q1 FY2021, RDSA managed to reduce the net debt from USD 75.39 billion in FY2020 to USD 71.25 billion in Q1 FY2021.

Financial Ratios (FY2020)

 Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 14 July 2021, at 7:05 AM GMT, RDSA’s shares were trading at GBX 1,444.20, down by 0.19% against the previous day closing price. Stock 52-week High and Low were GBX 1,598.15 and GBX 878.10, respectively.

On a daily chart, RDSA's price is sustaining above 200-day EMA of about GBX 1,412.40, indicating the possibility of an upward movement. The 200-day SMA of about GBX 1,341.00 is also sustaining below the stock price. Hence, there could be an uptick in the stock price in the near term. The momentum indicator RSI (14-period) is trading at ~48.89 level and moving towards the oversold zone. The MACD line is trading above the centreline and forming a positive crossover with the signal line.

In the last three months, RDSA’s stock has delivered a positive return of ~3.71%. Also, it has outperformed the FTSE 100 index with a return of about 3.40%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

RDSA delivered a resilient performance in Q1 FY2021, with around 724% growth in adjusted earnings QoQ. It also reduced its net debt significantly. The management is planning to move to its next phase of capital allocation and dividend distribution, which provides further confidence for FY2021. In FY2021, the Company expects strong production, driven by an improved macroeconomic outlook and its robust operational efficiency. The Company could benefit from its sector-leading cash generation, a new agreement with Deutsche Telekom, the proposed CCS facility in Alberta, its acquisition of Ubitricity and the impending economic recovery going into H2 FY2021. The management anticipates further productivity benefits as the pandemic situation improves. The Board is confident that the overall positive momentum would drive further growth opportunities.

Considering the benefits of the acquisition, the Company’s resilient performance, its sector-leading cash generation, its new agreements and partnerships, the decent liquidity and leverage position of the business, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Royal Dutch Shell Plc at the current price of GBX 1,444.20 (as on 14 July 2021 at 7:05 AM GMT), with lower-double digit upside potential based on 5.06x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective buy stock once the estimated target price is reached.

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