Royal Dutch Shell (RDSB) released third quarter financial results last week. The Anglo-Dutch giant has suffered badly in recent months, though you could say that about any oil & gas stock. Its shares closed yesterday at just over 970 pence apiece according to my screen. That is around 12% higher than the multi-decade lows from last week, albeit down on the last time I covered the stock back in August. The shares remain down almost 60% so far this year.
As for financial results, adjusted profit for the period clocked in at $955m. That was down significantly on the $4.7B earned over the same period last year, though I doubt this comes as much of a surprise to anyone. The company’s realised liquids price fell by over $18 per barrel year-on-year, while refining margins also continue to be hit hard by the COVID pandemic. Upstream production also fell 14% year-on-year due to curtailments and shut-ins in the Gulf of Mexico.
Turning to cashflow, and operating cashflow came in at just under $9B excluding changes in working capital. That was down from around $12B in the year-ago period, but enough to cover the $4.9B CapEx and dividend bill. The latter, of course, was cut by two-thirds back in the second quarter. The company received around $900m in asset divestment proceeds, with net debt falling to just under $73.5B as a result. That was down from circa $77.8B at the end of the second quarter.
The other significant piece of news was the announcement of a bump to the dividend. The quarterly payout increased to 16.65¢ per share, which represents a circa 4% rise on the previous level. That came alongside the announcement of a new capital allocation plan, the first part of which is to reduce net debt to $65B. The company should hit that target within the next couple of quarters based on current operating conditions and a $20B annual CapEx budget. What’s so special about $65B, I hear you ask. Well, management basically sees that figure as being commensurate with a ‘AA’ credit rating.
Anyway, after hitting this debt target, management then envisages spending between 20% to 30% of cashflow on shareholder distributions. In truth, I’m not sure that such a rigid rule is the best way to go for a cyclical company. It essentially raises the prospects of share buybacks occurring at cycle-highs, which is when cashflow and stock prices are highest. Better to pay a consistently fat dividend and allow excess cash to accumulate in good times, but that ship has sailed. The company does, at least, plan to raise the dividend annually going forward. Stock buybacks can probably take care of this without spending much more in nominal terms.
On the plus side, it does highlight how incredibly cheap the stock has become in recent months. I mean, the company has now generated around $22.8B in cash from operating activities so far this year (excluding changes in working capital). Let’s call it $30B annualised, and that is obviously with oil prices and downstream margins in the toilet. A quarter of that number leaves us over $7.5B for shareholder distributions, implying a prospective shareholder yield of over 7.5%. That number obviously rises substantially under reasonable estimates of mid-cycle conditions. On that basis, I’d say the valuation looks much too attractive in the low-interest rate world we find ourselves in, and I expect the stock to have much better year or two ahead of it.
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