The City saying goes, “never sell Shell”. Of course, the oil major has gone through some major cycles since the end of World War 2, and there have been plenty of peaks and troughs in recent years. Such is its resilience, however, that the company has never cut the dividend, rewarding loyal shareholders with decades of reliable income.
This week’s results were great. With oil prices back at $60, Royal Dutch Shell (RDSB) reported third-quarter profit on a current cost of supplies (CCS) basis up 47% to $4.1 billion (£3.1 billion). That gives underlying earnings per share (EPS) of 50 cents, up 43% year-on-year, or 14% better than the previous quarter.
Despite all the moaning about affordability, Shell kept the dividend at 47 cents a share. Underlying operating expenses continues to drop and capital expenditure for the quarter fell by 25% to $5.7 billion.
“Reported cash flow for the last four quarters when the Brent price averaged US$51/bbl was $38 billion, that would cover cash capex of $23 billion and the full dividend paid in cash of $15 billion,” writes Panmure Gordon analyst Colin Smith.
“Although the reported cash flow was weaker than we expected, stripping out the working capital impact, cash flow for the quarter was $10 billion which compares with $9 billion for 2Q17 and $7.8 billion for 3Q16, demonstrating continuing improvement. The run rate in capex suggests Shell may come in below its headline target of $25 billion for 2017.”
In response, Panmure repeats its ‘buy’ rating and upgrades EPS forecasts for 2017 by 16% to $1.91. The price target for Shell shares goes up from 2,500p to 2,700p “based on the perpetualised value of the dividend and current parameters for the required equity return”.
There were beats versus Panmure’s forecasts both in the upstream and downstream businesses, and a first profit in 12 quarters for the North America operations.
“While this set of results lacked the sugar rush of those reported by BP earlier in the week, nevertheless they have prompted a significant upgrade and on our estimates Shell is on a lower rating to BP at our respective target prices,” says Smith.
“Moreover, although Shell made no direct reference to neutralising the scrip or share buy-backs, it already has a stronger balance sheet than BP and we expect it to be on a significantly higher cash yield from next year and prospectively.”
Having almost doubled in value since early 2016, Shell trades on a forward price/earnings (PE) ratio for next year of 16 times and offers a prospective dividend yield of 5.9% on Panmure’s numbers. That compares with BP (BP.) on 18.5 times and an identical yield.
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