ii view: Shell appears to signal caution

Energy giant Shell is keeping a lid on capital expenditure. Should investors be concerned? 

Fourth-quarter trading update

• Full-year 2019 cash capital expenditure expected to be at the lower end of a $24-29 billion range
• Impairment charges in the range of $1.7-2.3 billion

ii round-up:

In a brief trading update ahead of its fourth-quarter and full-year results in late January, oil major Royal Dutch Shell (LSE:RDSB) appeared to express further caution.

Full-year 2019 capital expenditure is expected to be around the lower end of management’s $24-29 billion range. Contained expenditure comes in the wake of doubts expressed at its third-quarter results over the pace of its mammoth share buyback programme.

Anglo-Dutch firm Shell, which operates in over 70 countries, previously raised uncertainty over its financial goals including debt reduction and the completion of $25 billion of buybacks by the end of next year, given prevailing economic conditions. 

The shares fell by just under 1% in early UK stock market trading.

The update, which was not made in late 2018, follows investor criticism regarding the unpredictability of the group’s financial results.

Fourth-quarter upstream production is forecast to be between 2,775 and 2,825 thousand barrels of oil equivalent per day (boe/d), marginally higher than management’s prior guidance of 2,650 to 2,800 thousand boe/d, while in line with industry peers, impairment charges of between $1.7 to $2.3 billion are expected to be taken. 

ii view:

Royal Dutch Shell today consists of Upstream, exploration & extraction, and Downstream refining divisions. It also includes Integrated Gas – largely the former British Gas liquefied natural gas (LNG) business – and a Power electricity focused division.

In a strategy update in June, Shell outlined its potential to distribute $125 billion or more to shareholders (dividends and share buybacks) over the five-year period of between 2021-2025. But subsequent updates, including today’s statement, have broadly raised more caution than optimism regarding its ability to deliver. 

For investors, and outside of management’s control, the oil price remains a key ingredient, with $60 per barrel central in its projections. Within its control, a transition of the business portfolio towards more climate friendly alternatives is being pursued, while shareholder returns remain attractive – the estimated forward dividend yield is over 6%. For now, Shell’s position as a core portfolio constituent remains justified.  

Positives: 

• Third-quarter profits beat analyst forecasts
• Shareholder returns a core focus
• Acquisition of BG Group improved both its product diversity and climate change credentials

Negatives:

• Increased concerns regarding its delivery on financial targets
• Gearing has risen to 27.9% from 23.1% in Q3 2018
• Subject to factors outside of its control such as geopolitical tensions

The average rating of stock market analysts:

Buy