2013 was another non-starter for Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), and days into 2014 it stalled again. On Friday, Shell issued a profits warning, predicting adjusted earnings of $2.9 billion for the three months to the end of December, well below City expectations. It blamed oil and gas prices and difficult industry refining conditions. I was as disappointed by any investor, because I was hoping it would start the year with a clean slate, following the appointment of new chief executive Ben van Beurden. But now I’m over the shock, I am hopeful that Shell is finally going to start motoring again.
Shell’s recent performance has been far from slick. Its share price is down 3% over the past two years, against a 21% rise in the FTSE 100. The Anglo-Dutch oil major has been shellacked by rising upstream and exploration costs, falling refining margins, and theft and supply disruptions in Nigeria. Oil price and currency volatility hasn’t helped, nor has that European Commission probe into price fixing. Perhaps investors are immune to bad news, because this year’s profit warning did little to dent the share price.
Shareholder’s friend
The focus may shift this year as Shell moves to sell up to £18 billion worth of assets, including its £4.25 billion stake in Australian oil and gas producer Woodside petroleum, and £1.2 billion of oil assets in the Niger Delta. If completed, this would be the largest sell-off in the company’s history. Exane BNP Paribas has been backing Shell on the assumption that van Beurden would put the company’s house in order. It said he would be disciplined with company cash and adopt a more “shareholder-friendly approach”, by pumping out higher dividend payouts.
Shell hasn’t exactly been stingy with shareholders, splashing out $5 billion on share buybacks in 2013, and distributing more than $11 billion of dividends. After a 5% rise in its Q3 dividend it now yields 4.6%, against a FTSE 100 average of just 3.5%. It is also generously covered 2.5 times. The yield has been Shell’s saving grace for several years. Now I’m hungry to see a bit of share price growth as well.
Beyond the shale
So will we get it? After a 6% drop in earnings per share (EPS) in 2012 and 18% last year, things look more promising. EPS are forecast to grow a healthy 11% in 2014, lifting the yield to 5% by December. Yet Shell still isn’t firing on all cylinders. Its refusal to invest in British shale suggests a lack of confidence, with management keen to side-step what is a risky and politically controversial area.
Trading at 8.7 times earnings, against 13.3 for fellow underperforming oil major BP, today looks an attractive entry point. Future growth may be a little stop-start, with EPS forecast to be flat in 2015, but I’m sure Shell will prove a winner in the end. The profits warning could even help, by pushing van Buerden into radical action to restore the company’s fortunes.
