Shares in Royal Dutch Shell (LSE: RDSB) have jumped this morning after the company reported its fourth quarter and full-year results. Shell is the latest of the big US and European oil majors to report results for last year and is, so far, the only oil company that has met City expectations.
Shell reported a profit for the full year of $3.8bn, down 80% year-on-year. Earnings on a so-called current cost of supplies basis (CCS), the number closely followed by analysts and used by management for decisions about allocating resources and assessing performance, fell 57% in the final three months of last year to $1.8bn. Full-year CCS earnings were $3.8bn compared to $19bn for 2014, a decline of 80%.
And like most of its peers, Shell’s borrowing increased during 2015 as the company maintained its dividend policy and spending plans in the midst of falling oil prices. Gearing at the end of 2015 was 14% compared with 12.2% at the end of 2014.
Further cuts
Shell’s chief executive Ben van Beurden used today’s results release to outline how the company is dealing with the low oil price and comment on Shell’s upcoming acquisition of BG, which is expected to complete in a few weeks’ time.
Following completion, Shell will move to axe some 10,000 staff and direct contractor positions in 2015/16 across both companies. Capital investment for Shell and BG combined for the full year 2016 is expected to be $33bn, down some 45% from the peak of combined spending by the two groups. Shell’s capital spending was $28.9bn in 2015, $8.4bn lower than in 2014. The company’s cash flow from operations, excluding working capital movements, was $24.3bn.
The group has also exited or postponed some investment decisions for this year to help it manage capital spending amid the oil decline. For 2016, the company has exited the Bab sour gas project in Abu Dhabi and is postponing its final investment decisions on LNG Canada and Bonga South West in deep water Nigeria.
Further, Shell’s operating costs fell by $4.1bn during 2015 and costs are expected to fall by a further $3bn, or 7.3%, during 2016 including synergies from the BG acquisition. Shell/BG’s operating costs this year are set to be a full 15% lower than their peak in 2014.
All of these actions are designed to protect cash flows, minimise borrowing and safeguard Shell’s dividend payout. Indeed, Shell’s management reiterated today that the group is committed to its $1.88 per share dividend in 2016, as previously announced. At current levels, that’s a yield of 9% for investors.
The bottom line
Shell’s shares have underperformed the wider oil and gas index this year amid concerns that the company’s dividend yield isn’t sustainable. However, based on today’s figures, it looks as if the company can continue to maintain the payout for the foreseeable future even if prices remain at depressed levels.
