Royal Dutch Shell PLC (LON: RDSA)

Royal Dutch Shell PLC is an FTSE 100 listed energy company engaged in exploration, production, refining and marketing of crude oil and natural gas, and chemicals. The company has also diversified into power, wind, and solar, and new fuels for transport, such as advanced biofuels and hydrogen.

On 1 September 2021, RDSA announced that it had offered to install 50,000 on-street electric vehicle charging devices. These devices would be installed in the UK in four years. It could help RDSA achieving a third of the public charging market by 2025.

On 28 October 2021, RDSA would release its Q3FY21 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 FY16 to FY20.

Going forward, the Company would maintain a progressive dividend policy to grow dividends per share by 4% annually.

For Q2FY21, the management declared an interim dividend of USD 0.24 per share to be paid on 20 September 2021 (Ex-Dividend date: 12 August 2021).

Energy Market Outlook:

As per the recent report published by OPEC, for FY21, the Oil demand is still estimated to increase by around 6.0 mb/d to average 96.6 mb/d. By 2022, world oil demand is still projected to increase by 3.3 mb/d y-o-y, and the total world oil demand is projected to surpass the 100 mb/d thresholds in H2FY22 and reach 99.9 mb/d on average for the whole of FY2022.

On the other hand, global energy demand is likely to recover from the 4% contraction on FY20 and grow by more than 4.6% (approx.) in FY21.

Growth Prospects

• Focus on future energy: To combat the increasing carbon emission globally, RDSA has partnered with multiple companies and developed a strong relationship with its customer to move to net zero-emission. The Company plans to become one of the leading providers of clean power. The Company plans to invest around USD 100 million per year in quality nature-based projects.

(Data Source: Company Presentation)

• Higher shareholder distribution: The Company plans to target 20-30% of the cash flow from operations to be distributed to the shareholders. The Company has a progressive dividend policy and aims to achieve ~4% dividend growth annually. In addition, the Company initiated its share buyback worth USD 2 billion.
• Strong capex plans: The Company made recent investments in the Gulf of Mexico and Canada. RDSA plans to target ~80% of cash capex to core positions and maximize value from lean positions while maintaining low methane emissions. The Company also plans to reduce OPEX by 20-30% at the end of FY25 and maximize value through integrations.
• Increased market footprint in LNG: RDSA plans to increase its market share by creating new markets and attracting new customers. As a result, the Company aims to achieve more than 20% market share in LNG bunkering by the end of FY30.

Key Risks

• Volatile rates: Any unanticipated fluctuation in prices of crude oil, natural gas, oil products and chemicals due to macroeconomic uncertainty could impact the financials of the Company.
• Failure to properly evaluate oil reserves: If the Company fails to properly estimate oil reserves, it could have a material impact on the Company's financial outlook.
• Geographical risk: The Company operates in more than 70 countries, thus exposing it to multiple regulations, political uncertainties, and disputes.
• Integration risk: The Company follows a cautious approach in its investment; however, failure to correctly estimate or create synergy could lead to additional costs or loss.
  

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

Financial and Operational Highlights (for Q2FY2021 and H1FY2021 ended 30 June 2021 as of 29 July 2021)

(Source: LSE Website)

• Driven by a decent operational and financial performance, the Company achieved USD 14.2 billion CFFO excluding working capital and USD 5.5 billion as Adjusted Earnings.
• The Company is targeting AA credit metrics through the cycle with USD 65 billion net debt milestone.
• In the LNG segment, the Company expects LNG volume to be approximately 7.4 to 8.0 million tonnes in Q3FY21, mainly due to maintenance activities.
• In the Oil segment, the Company delivered decent growth in margins due to higher intake and utilization. Going forward, the Company expects refinery utilization to be around 73% to 81% in Q3FY21.
• In the chemicals segment, the operating expenses were higher in Q2FY21, mainly due to maintenance catchup and lower spreads in key value chains.
• As per the latest full-year estimate, the adjusted corporate earnings are lowered to a net expense of USD 2,300 million to USD 2,600 million.
  

Financial Ratios (Q2 FY2021)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 1 September 2021, at 1:22 PM GMT, RDSA’s shares were trading at GBX 1,437.40, up by 0.41% 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 20-day EMA of about GBX 1,436.80, indicating the possibility of an upward movement.

In the last year, RDSA’s stock has delivered a decent positive return of ~36.16%. Also, it has outperformed the FTSE 100 index with a return of about 21.45%.

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

Business Outlook

RDSA delivered a decent performance in Q2FY21, with a strong cash flow from operations of USD 14.2 billion. Adjusted earnings stood at USD 5.5 billion. RDSA targets AA credit metrics while maintaining a disciplined capex for FY21 at USD 22 billion, indicating solid financial management while investing in future growth drivers. The Company could benefit from economic recovery and rising Crude Oil and Natural Gas prices. However, the management expects lower production of LNG in Q3FY21 due to planned maintenance activities. The full-year guidance for the Corporate Adjusted Earnings is lowered to a net expense of USD 2,300 - 2,600 million.

Considering the Company’s shift to sustainable and environmentally friendly products, its continued investments, the improved profitability, liquidity and leverage position, 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 1,437.40 (as on 1 September 2021 at 1:22 PM GMT), with a lower-double digit upside potential based on 9.33x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. Resistance level 1 is around 52 week high, and if Royal Dutch Shell Plc attains momentum or breach it, then the target price as per valuation table could be seen in the near term as per technical chart analysis.

*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.

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