Big oil is back. As anticipation rises that the economy will get back to normal soon, oil prices have rallied this year. And the results of big oil companies like BP earlier this week, and Royal Dutch Shell (LSE: RDSB), are looking quite healthy as a result.
Here are the three points that stood out for me when Royal Dutch Shell made its earnings announcement earlier today.
#1. Back in the green
It reported a massive 241% increase in income to $5.7bn from last quarter, when it showed a sizeale $4bn loss. This was also a big improvement from the same quarter last year, when the FTSE 100 oil giant had reported a loss.
#2. Reducing debt
Much like its FTSE 100 peer BP, Royal Dutch Shell is reducing debt. Its debt was down by 5% to $71.3bn quarter-on-quarter.
Its gearing, which is the ratio of debt-to-capital, was also down to just a shade below 30%, better than 32.2% last quarter. The company has a target of bringing the number to 25%. It was closer to that in Q1 last year, when gearing stood at around 29%. But the developments in 2020 were hardly conducive to further reductions.
Even with an improved economic outlook, there is a chance that the pandemic can continue longer than we expect. Keeping this in mind, I think that Shell’s efforts at bringing debt down is a particularly good development now.
#3. Dividends rise
Royal Dutch Shell was a rewarding dividend-payer until early last year. But now its dividend yield has dwindled to around 3.5%. I think slashing dividends was a sensible move at a time when it was running losses. But I reckon it left income investors underwhelmed too.
It has sweetened the deal a bit now, however. Shell just increased its dividends by 4%, which amounts to a $0.16 increase in dividend per share. If this is the only rise for 2021, then I calculate the dividend yield rises to 4.3% for the year. This is a fair bump up from the yield earlier.
At any other time, I would be more optimistic about dividend increases, but this is not any other year.
Negatives for Royal Dutch Shell shares
In its outlook, Royal Dutch Shell remained cautious. It expects macroeconomic uncertainty could result in “negative impact on demand for oil, gas and related products”. Going by its struggles of the past year, I think we should be prepared for unforeseen setbacks in 2021 too.
The takeaway
On the whole I am optimistic going by the broad consensus on growth. Growth forecasts are being raised, not reduced. Oil demand is closely linked to the state of the economy, which should bode well for big oil companies.
There is of course the question of sustainability over the long term. But here too, a pivot towards clean energy has begun. I think Royal Dutch Shell shares are an attractive buy today.
