Royal Dutch Shell (LSE: RDSB) reported lower year-on-year income in the third quarter of 2019. Comparatively lower oil and gas market prices and lower margins in the chemicals business took the blame.
The third quarter was not, however, a disaster. Shell’s share price ticked up a little following the results announcement at the end of October. Earnings were $4.8bn, 15% lower than a year ago, but still sizeable.
Strong start
Operating cash flows were a little higher than a year ago ($12.3bn vs $12.1bn), and the same was true for free cash flow which came in nearly $200m higher at $10.1bn
Total dividends paid during the quarter were $3.8bn, and Shell told shareholders it was pressing ahead with its share buyback programme. $12bn worth of shares have been taken out of the market so far, and $2.75bn more could be bought by January 2020.
Shell’s shares are trading around 2,250p right now, which is lower than the 2,340.5p seen at the start of 2019, and the July high of 2,612p.
Q1 2019 earnings were better than the year before, and the company’s management lauded the strong start the company had made.
But the strong start did not last, with second-quarter earnings down 50% year-on-year. The share price tumbled and has not recovered. The third quarter was probably better than many investors expected, but it did not reverse the damage done in the second: nine-month earnings for 2019 are $14.9bn, some 16% lower than the $17.8bn racked up by this time last year.
Weak finish
Can the company turn it around in the fourth quarter? Probably not. Back in October, trading conditions were forecast to be “challenging” by management throughout the rest of 2019 and into 2020.
Just last week the company released an update to its fourth-quarter expectations. It has lowered its oil products sales forecast for the quarter, and therefore 2019 will see annual sales below 2018. That has not happened since 2014.
The company will recognise between $1.7bn and $2.3bn in post-tax impairment charges in the fourth quarter. A chunk of this must surely come from the value of oil and gas reserves having to take a hit because of weaker market prices.
Shell has admitted that reducing its net gearing ratio to 25% in 2020 will be challenging. This ratio has crept up to near 28% because of a change in the accounting treatment of operating leases. It also admits there is uncertainty about completing its share buyback programme within its 2020 timeframe.
Going with the flow
Shell is not alone in going through a rough patch. Lots of other oil majors are writing down assets and forecasting weaker sales. What they all have in common are trade tensions between the US and China, downward revisions to global growth, and weaker oil and gas prices.
The long-term investor will do well to remember that Shell has paid a quarterly dividend without interruption since at least 2006. It is a cyclical company, and there will be ups and downs in its share price. Right now disappointing fourth-quarter results — released towards the end of January 2020 — are in the price.
At the moment, the trailing 12-month dividend yield is about 6.5%. That has my attention, and I will be a shareholder of Shell for 2020.
