Asit Sen, CFA
Cowen and Company
646-562-1364
[email protected]
With a relatively low sensitivity to oil prices, Royal Dutch Shell (RDS) is well positioned in the current commodity environment. The long-term agenda set out by the new CEO to improve performance is clear, following some tangible success in 2014. We continue to see restructuring tailwinds into 2015. The long-term upstream project line-up is solid, and Integrated Gas remains a key profit engine.
We [were] impressed by improved upstream unit profitability (up 32% year over year) at $17.10 per barrel of oil equivalent [in Q3'14], although production volume was below our expectations. Q3'14 EPS of $1.85 compares to our estimate of $1.70 (Street $1.74) … [T]he variance came from upstream Americas (+$0.12 per share) and downstream (+$0.12 per share), partially offset by corporate earnings (-$0.10 per share).
Despite lower oil prices and overall production (-9% sequentially), upstream earnings benefited from new higher-margin production, lower exploration expenses and higher earnings from integrated gas. Downstream results benefited from increased contributions from refining, including improved operating performance and trading. Key highlights from Q3'14:
Net income per barrel increased 32% year over year to $17.10 per barrel of oil equivalent, as Shell continues to reshape its portfolio, replacing lower margin barrels with higher margin barrels.
Liquefied natural gas (LNG) volumes up 16% year over year: LNG volumes in Q3'14 equated to almost 5.7 million metric tons per annum, up over 16% year over year, driven primarily by the acquisition of Atlantic and Peru LNG. The Repsol LNG transaction has been surprisingly accretive.
Deep-water production is approaching 300 million barrels of oil per day equivalent, up from the low-point of 170 million barrels of oil per day equivalent [a year earlier].
Along with new production (Gumusut, Cardamom & Bonga NW), substantial incremental long-term opportunities exist in the Gulf of Mexico Appomattox and Vito. Also, exploration momentum continues.
Asset sale program on track: With $12 billion of divestment completed this year, the $15-billion two-year asset sale program is progressing ahead of schedule. Currently, an additional $4 billion of asset sales are in progress.
Solid balance sheet; cash distribution target reiterated: Gearing at the end of Q3 was 11.7%. Cash distributions (dividend plus buyback) over the past year have amounted to $15 billion and are in line with the $30 billion target for '14 and '15.
Stephen Simko, CFA
Morningstar
312-384-5448
[email protected]
Of the European integrateds, Shell is currently the best positioned to withstand prolonged cheap oil, given its relatively robust financial health. Still, there's no question 2015 is going to be a very challenging year for the firm.
With a capital outlay budget that is set to approach $35 billion and a $12 billion annual dividend payout, Shell is set to burn more than $13 billion in free cash flow based on current oil price futures.
