Back in January, said it was time to rev your engines, because Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) was ready to click into gear after a couple of troubled years. At the time, its share price stood at 2240p. Today, it is 2257p, a rise of 13% against just 2.7% on the FTSE 100 over the same period.
Shell started the year with a profits warning, a canny move by new chief executive Ben van Beurden who, in the time-honoured tradition, could blame the problems on his predecessor. I warmed to his plans to offload up to £18 billion worth of assets, be more disciplined with company cash, and reward loyal shareholders with higher dividend payouts.
The Cash Keeps Flowing
Shell wasn’t exactly stingy on that front anyway, gushing $5 billion on share buybacks in 2013, and distributing more than $11 billion of dividends. Despite this largesse, investors had taken against the company. They’re a lot happier now.
Three months after his profit warning, van Beurden was in a position to claim that his three-pronged focus on financial results, capital performance and operational performance/project delivery were starting to “gain traction”. Although profits of $4.5 billion were down on $8 billion year-on-year, cash flow from operating activities was sharply up, from $11.6 billion to $14 billion. This helped fund a 4% rise in the first quarter dividend to $0.47 per ordinary share.
Saudi’s Barren Desert
There are still plenty of bumps on the road. After 10 years, Shell has given up its search for gas in the Saudi Arabian deserts. It is active in Russia, but could suffer if the US imposes sanctions in the Ukraine stand-off. There are fears of oversupply in the wider energy market, and the rising cost of oil exploration in ever more inhospitable terrain will undoubtedly squeeze margins. There are also signs that solar power could become the first renewable rival to pose a serious threat to big oil. But for now, the world still can’t live without black gold.
On the plus side, Shell continues to divest, recently announcing plans for an IPO of its wholly owned subsidiary Shell Midstream Partners. I quietly applaud its decision to retreat from the UK shale oil and gas market, warning over challenges such as “geology, cost and access”. As the fracking hype recedes, and the scale of investment required grows larger by the day, I suspect shale won’t be the bonanza many originally claimed. Shell is probably right to suggest that the risks outweigh the rewards.
Fancy Another 20%?
Shell has so far sidestepped the Iraq crisis, despite its operations in the country, because they tend to be in Shia-dominated areas where Isis is unlikely to gain a foothold. It sees massive prospects in liquid natural gas (LNG), particularly in Asia.
The downside is that it isn’t as quite cheap as it was in January, although it still trades at a forecast 11.4 times earnings for December. The yield is also slightly lower at 4.2%, but that remains comfortably above the FTSE 100 average of 3.5%. Shell’s share price is nearing an all-time high, but Deutsche Bank sees scope for another 20% uplift.
Yes, Shell has got its strategy right this year, suggesting this road still has further to run.
