Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is a firm that I rate highly, but there’s no doubting the fact it has become a bloated, high-spending beast of a company in recent years — and Friday’s profit warning from new chief executive Ben van Beurden made clear that shareholders can expect changes on his watch.
However, Shell’s woes have been plain for all to see for some time, and to some extent, Mr van Beurden’s efforts were designed to help his cause by clearing the decks of bad news at the start of his tenure.
What’s the damage?
Let’s take a closer look at Shell’s problems. Full-year adjusted profits are now expected to drop to around $19.5bn, compared to consensus forecasts of around $21.7bn.
Today’s update confirmed the cash flow squeeze that investors have been suspecting for some time — Shell’s forecast net capital expenditure of $44.3bn for 2013 will exceed the firm’s operating cash flow, which is expected to clock in at around $40.4bn.
Despite this, Shell’s third-quarter results show that the firm has spent $5.6bn on dividends and $4bn on share buybacks so far this year — money that it can ill-afford. The expenditure has been funded by drawing on falling cash balances and creating new debt, increasing the firm’s gearing from 9.8% at the end of 2012 to 16% at the end of 2013.
Impairment season
Shell expects to announce impairments of approximately $2.7bn in its full-year results, mainly from its upstream division.
The majority of this reflects the $2.1bn write-down Shell booked in the second quarter as a result of its failed bet on US shale exploration. Shell expects to have lost money producing oil and gas from its US onshore fields in 2013, and is currently trying to sell its 106,000 acre interest in the Eagle Ford shale formation in Texas.
What’s the 2014 outlook for Shell?
Friday’s update looks like good news to me, and I expect to see a thorough shake-up of both management and assets in 2014, which should ultimately result in improved shareholder returns.
Based on today’s revised profit guidance for 2013 of $19.5bn, I’ve estimated that Shell’s earnings per share for 2013 could be around $3.10, below recent consensus forecasts of $3.49. My estimate leaves Shell shares trading on a 2013 P/E of 11.5, with a prospective yield of 4.9%.
