Why Royal Dutch Shell Plc Has Great Growth Prospects

royal dutch shellShares in Royal Dutch Shell (LSE: RDSB) (NYSE: RDS.B.US) have had an erratic year, pretty much echoing the FTSE 100 overall with a 12-month gain of about 4%, to reach today’s 2,285p. By comparison, BP has seen its shares pick up 7% over the same period, with the two companies offering almost identical dividend yields.

Why is that, and what does 2014 have in store for Shell?

Here’s last year’s headlines together with forecasts for this year and next:

Dec EPS Change P/E Dividend Change Yield Cover
2013 160p -39% 14.3 108p +4.7% 4.7% 1.5x
2014* 193p +21% 10.6 113p +5.6% 5.1% 1.9x
2015* 207p +7.3% 10.2 117p +2.6% 5.3% 1.9x

* forecast (pre-warning expectations excluded)

So what happened to Shell in 2013?

Profit warning

Well, forecasts were looking reasonable until Shell hit us with a shock profit warning in January, saying that earlier Q4 earnings expectations were set to be slashed from $4bn to around $2.2bn — compared to $7.3bn a year previously. The company cited lower upstream volumes, higher exploration costs and tough downstream market conditions as the reasons.

When full-year results were released a couple of weeks later, Shell revealed earnings on a current-cost-of-supplies basis of $16.7bn, compared to $27.1bn a year previously. That wasn’t good, but it was better than has been expected after the warning, and the shares recovered a little on the news.


At the same time, Shell announced something of a change in direction, with chief executive Ben van Beurden saying “We must improve our financial results, achieve better capital efficiency and continue to strengthen our operational performance and project delivery“.

With an exploration venture in Alaska to be scrapped and $9bn of asset sales targeted for this year, Shell reckons it will see capital expenditure fall to around $37bn in 2014, from $44bn in 2013.

Earnings back in 2014?

The disappointing end to the year led to quick broker downgrades for 2014 and 2015, but if the latest expectations are close to the mark then we should still see a strong recovery in earnings this year with modest growth continuing in 2015.

On a forward P/E of under 11, the shares might be a good punt if you want those recovering earnings — with pretty reasonable dividend yields to keep you going in the meantime.

We should have 2014’s first-quarter figures on 1 May.

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> Alan does not own shares in Royal Dutch Shell.