Analysis Shell (RDS) update nov 4th,2018

Royal Dutch Shell is a global integrated and one of the biggest oil & gas companies of the world with an average production of 3,596 thousand barrels of oil equivalent per day (Q3/2018) generating revenues of nearly 400 bn$/yr. and net profits of 22bn$ or 2.65$/share(estimate 2018)

Shell is a company with a glorious past. Today it is a dividend play with a dividend yield of >5%. The highlight is that the RDS B share is noticed on the LSE. There is no withholding tax applied in the UK. Hence you`ll get the full dividend paid on your account. The RDS A share is noticed in the Netherlands. The Netherlands plan to cancel the withholding tax as well. 

Risks & Chances

The dividend of RDS is a sword with two sides. RDS is informally committed not to lower the dividend and it did not do it since WWII. This gives reliability to retired shareholders but on the other hand it is a burden during oil&gas downturns. During the period of low oil prices 2015 - 2016 the dividend ate up more than the free cash flow increased depth, increased the number of shares by a script dividend option and kept RDS from taking opportunities as buying assets for low prices beside BG.

Integrated gas means gas production, terminals, liquidification and regassing plants... On my point of view LNG is a great opportunity for the future. I assume that LNG might become a major energy source to power ships, engines, vehicles and homes not connected to the gas grid. 

Another opportunity for RDS in the long run is the downstream and the chemical sector. There is less politics (arbitrary decisions, nationalizations, sanctions) in the downstream sector than in upstream. Margins in the chemical and downstream sector are in average (fluctuations) quite well if the location of the plants is chosen well. The downstream and chemical sector is more stable than the upstream sector. 

RDS invests about 30 bn $/yr (25bn$ 2018)(3). This amount is not sufficient to replace the depletion of the existing reserves by new fields. 1- 2 bn $ of that is wasted to political investment see below. Production decreased from the 3.657 mio. bl/d of Q3/2017 to 3.596 mio. bl/d in Q3/2018. This represents a year-over-year production decline of 1.67%. 

The price sensitivity of RDS is 6bn$ CFFO (0.72$/share) per 10$ fluctuation in Brent oil 

RDS management seems to be very saturated. On government and NGO pressure it committed to stop production in the Groningen gas field (the biggest in Europe and a big cash cow) by 2030 without compensation. A new hungry management team would be a great opportunity for RDS. 

RDS management invests 1 - 2 bn$/yr. in "renewable energies". Renewable energies as solar & wind generate electricity according to the coincidences of the weather, daytime & season. The value of this electricity is close to 0. The earnings are generated by subsidies and regulation. Beside of the moral question the margins are by far lower than that of the oil&gas business. The political risk from elections and governmental changes are high. I suggest that the RDS managements saturation let them buckle to the pressure of green NGO (climate hoax)??. 

Actually oct.18, RDS is going to sell its Venzuela assets (2). RDS kept the assepts thru years of socialist ruling and suffered a lot. No investor will actually pay a good price for it. In the meantime it looks very much as if the socialist ruling comes to a collapse most probably sooner than later. A clever management would try to keep a foot in the door of the worlds largest oil reserves to be in a good starting position when the socialist ruling comes to an end.

I have the impression that the RDS management is not the most clever management on earth.

Observations

RDS is split in 3 divisions Integrated Gas, Upstream and Downstream. Integrated Gas is the biggest profit contributor, the other 2 division are about equal. In q3/18 the profit increas from the upstream more than compensated the decrease in downstream. 

(3)

Speculation

A main play of RDS is the LNG market. Most analyst assume that the demand for LNG is outgrowing the supply in a few years. The analysts believe that a large share of this additional demand comes from China and India.

(3)

On my point of view China is getting more and more in a rivalty with the USA. There are conflicts about some islands in the Pacific and Taiwan. The USA is a major producer and potential exporter of LNG. Thus I do not think that China will increase its LNG import as much as analysts believe. I rather think they will support the deveolpment of domestic gas resources, promote the use of electicity (coal, nuclear) for heating similar to France and South Korea...coal for industrial heat... India has plenty of poor poeple that needs the least expensive energy. They do not care that much on pollution and not at all about the climate hoax. Thus they will rather promote coal. Potentially the demand will not outgrow supply and the profits from LNG might not fulfill analysts dreams.  

Notice

This is not a recommendation or proposal to do anything. It is my private personal opinion. I`m not independing as I own a position of RDS B shares. 

Some Data

WKN: A0ER6S / ISIN: GB00B03MM408

Number of Shares: RDSA 4,554,081,081 RDSB 3,745,486,731 Total: 8.299567812 (nov., 2018) ..." which would fall to 7,925,491,642 in 2020 after the buyback program has been completed". (1) The buy-back program has a volume of 25 bn$ completed end of 2020.

Ownership: Blackrock owns 4.7% of the shares. 

 

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Some Information

 

References:

(3) 18/11/01 https://seekingalpha.com/article/4217047-royal-dutch-shell-plc-2018-q3-results-earnings-call-slides?app=1&dr=1

(2) 18/10/13 https://seekingalpha.com/news/3397017-reuters-shell-seeks-sell-venezuela-jv-stake-frances-maurel-and-prom?ifp=0&v=1539344700

(1)18/10/02 https://seekingalpha.com/article/4209358-assessing-shells-potential-returns-higher-oil-prices?app=1&dr=1

18/10/01 https://seekingalpha.com/news/3394026-bloomberg-shell-partners-set-approve-31b-lng-canada-project?app=1