Royal Dutch Shell plc reports 63% fall in profit as low oil price begins to bite

Shell’s (LSE: RDSB) first set of results following the combination with BG Group show just how challenging the oil and gas industry is at the present time. The company has reported a fall in first quarter constant cost of supplies earnings per share of 63% when compared to the first quarter of the previous year. However, its share price is flat even after such a disappointing result.

Clearly, the market was expecting such a result since the price of oil has reached a low of $28 per barrel during the quarter. This has caused Shell’s cash flow from operating activities to come under pressure, with it falling from $7.1bn in the first quarter of 2015 to just $700m in the comparable quarter of the current year. That’s a drop of around 91% and means that Shell experienced negative working capital movements of $3.9bn during the quarter. And with gearing levels rising to 26% from 12% last year, investors could argue that the company’s financial future is in some doubt.

Don’t panic…

However, delving a little deeper shows that Shell remains a very financially sound business with a bright long-term future. Its gearing levels have risen mainly as a result of the BG deal, which has the potential to act as a springboard towards future profitability due to BG’s strong position within the liquefied natural gas space. And while Shell’s financial performance has been hurt by a lower oil price, its strategy of cutting costs seems to be positioning it for future growth, with it today announcing a further 10% reduction in investment spending for 2016 to $30bn.

Furthermore, Shell now believes that it will be able to integrate its operations with those of BG at a lower cost than was first anticipated. This should help to ease the pressure on its finances yet further and with the price of oil now higher than it was earlier in the year, Shell’s share price could move upwards over the medium-to-long term.

There’s certainly scope for an upward rerating to Shell’s share price. It trades on a forward price-to-earnings (P/E) ratio of just 13.3 and with an improving asset base following the combination with BG, Shell seems to be a relatively strong buy – particularly when its ability to reduce costs and make efficiencies it taken into account.

Shell also today announced a quarterly dividend of $0.47 per share, which is the same as in the previous quarter and also level with the dividend from a year ago. While the company’s disappointing financial performance is a cause for concern, Shell’s earnings are expected to cover dividends in the next financial year, which makes the potential for a severe reduction less likely. And with Shell yielding 7.4%, it remains a very enticing income play.

So, while Shell’s first quarter results make for difficult reading, it seems to be in a relatively strong position to deliver future capital gains as well as a high income return. As such, for long-term investors, now could be a good time to buy.

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Peter Stephens owns shares of Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.