Source: Oil and Gas IQ

Investment Thesis

The Hague, Netherlands-based Royal Dutch Shell (RDS.A) (RDS.B) reported its third-quarter results on October 30, 2020. Three important points characterize this third quarter.

First, the company decided to hike the quarterly dividend from $0.32 per share ADS to $0.333 per share ADS.

Second, the company posted a better-than-expected third-quarter profit of $0.12 per ADS share, following BP Plc (NYSE:BP) that I have covered recently.

And third, Shell is planning a significant restructuring to reduce greenhouse gas emissions to net-zero by 2050 or sooner.

It was a good improvement from the second quarter, and it has provided some much-needed confidence. Oil prices have recovered a little from the second quarter’s dismal performance. It helped.

This quarter’s global liquid price was $37.92 per Boe, which is well above the $24.31 per Boe received in the second quarter but far less than the $55.99 per Boe received the same quarter a year ago.

As we can see in the chart below, it is a multi-year record low. The trend in natural gas follows the same pattern from $4.21 last year to now $3.19. Below are historical prices for oil and gas.

The investment thesis remains the same. Shell is a perfect choice for a long term investment in the oil sector. The oil sector is weak because of a dwindling oil demand due to a paralyzed economy besieged by a stubborn virus pandemic. Still, it will definitely recover from this extraordinary situation, probably as soon as mid-2021.

As I said in the preceding quarter, cyclicality is an immovable part of the oil sector’s equation, and what goes down will go up again.

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Furthermore, it is also essential to trade short term a minimum of 30% of your position to take advantage of the volatility. The idea is to trade your long-term position.

The company is part of my leading oil integrated group:

Note: Shell is still paying 5.52% after cutting the dividend last quarter.

Shell has underperformed the group YTD and is down now, nearly 60% since January.

ChartData by YCharts

CEO Ben Van Beurden said in the conference call:

Shell of today is resilient. Our portfolio and our operations have shown remarkable resilience in incredibly challenging times. The measures that we took to preserve cash have paid off and made us stronger, both operationally, as well as financially. We have been consistently generating more operating cash flow than our peers.

Royal Dutch Shell – Financial Table 3Q’20, The Raw Numbers (per A.D.S.)

Important Note: Each American Depositary Share [A.D.S.] represents two Royal Dutch Shell plc ordinary shares.

Royal Dutch Shell 3Q’19 4Q’19 1Q’20 2Q’20 3Q’20
Total Revenues and others in $ Billion 86.59 84.01 60.03 32.50 44.02
Total Revenues in $ Billion 89.54 85.07 60.96 32.49 44.72
Net income in $ Billion 5.88/CCS 4.767 0.97/CCS 2.931 -0.02/CCS 2.86

-18.131/CCS 0.64

0.49/CCS 0.96

EBITDA $ Billion 16.35 12.30 8.83 5.25 9.12

EPS diluted in $/share

Adjusted earnings

1.46/CCS 1.18 0.24/CCS 0.74 -0.01/CCS 0.74 -4.66/CCS 0.16 0.12/CCS 0.24
Cash from operating activities in $ Billion 12.25 10.27 14.85 2.56 10.40
CapEx in $ Billion 5.99 6.71 4.26 3.44 3.68
Free Cash Flow in $ Billion 6.26 3.56 10.59 -0.87 6.72
Total cash $ Billion 15.42 18.05 21.81 27.94 35.71
(non-current and current) Debt in $ Billion 88.92 96.42 95.07 104.99 109.06
Dividend per share [ADS] in $/share 0.94 0.94 0.32 0.32 0.33
Shares outstanding (diluted) in Billion [ADS=1/2] 4.034 3.98 3.91 3.89 3.89
Oil Production 3Q’19 4Q’19 1Q’20 2Q’20 3Q’20
Oil Equivalent Production in K Boep/d (including Integrated gas) 3,563 3,763 3,719 3,379 3,081
Integrated gas K Boep/d 957 950 955 904 844
North America Oil Equivalent Production in K Boep/d 836 836 832 777 633
Global liquid price ($/b) 55.99 56.60 46.53 24.31 37.92
Global Natural gas price ($/Mbtu) 4.19 4.42 4.31 3.19 2.65

Sources: Royal Dutch Shell filing

Analysis: Revenues, Earnings Details, Total Debt, Free Cash Flow, And Oil & Gas Production Upstream, Downstream

1 – Revenues and other income were $44.72 Billion in 3Q’20. Royal Dutch Shell reported revenues and other income for the third quarter of $44.72 billion, down 50.5% from $89.54 billion in the same quarter last year and up 37.6% sequentially. Net income was $489 million or $0.12 per share.

During the third quarter, Shell generated cash flow from operations of $10.403 billion. Below is the detailed earnings chart per segment.

This quarter experienced a little rebound in realized oil, gas, and liquefied natural gas prices and weaker achieved refining and chemical margins.

Results snapshot from the presentation.

Below is the chart breaking down the earnings per segment from 2Q’17 to 3Q’20. Upstream in red was the most affected, but it was significant progress compared to 2Q’20.

Some references:

2 – Free cash flow is a loss of $6.72 billion in 3Q’20

Note: I use cash from operating activities minus CapEx to calculate the organic free cash flow. It differs slightly from the free cash flow indicated by Shell.

Yearly Free cash flow is now $19.999 billion, with a 3Q’20 free cash flow of $6.724 billion.

The dividend yield is currently 5.52% after the company increased the quarterly dividend by about 4% this quarter. The third priority for Shell is indicated below:

3 – Oil-equivalent production and other

Upstream production was 3,081 K Boep/d in the third quarter (including 844K Boep/d of Integrated gas and 34K oil products), down 13.5% compared to a year ago and down 8.8% sequentially (please look at the chart above).

North American Production is 633K Boep/d in 3Q’20, down 24.3% compared to the same quarter a year ago.

4 – Net debt and cash (effect of accounting rule changes IFRS 16)

The net debt increased to $73.463 billion at the end of September 30, 2020, compared with $77.843 billion in 2Q’20. Net debt has been reduced and is considered the second most important priority for Shell, to reach $65 billion in net debt.

The net debt-to-capitalization ratio was 31.4%, up from 27.9% a year ago.

5 – Outlook Q4 2020 from Presentation

Shell anticipates fourth-quarter 2020 upstream volumes of 2,300-2,500K Boep/d, while Integrated Gas production is expected between 830K Boep/d and 870K Boep/d and LNG 7.9 – 8.5 Million tonnes.

The company indicated a Cash CapEx of $19-$22 billion.

Conclusion and Technical Analysis

Royal Dutch Shell’s third quarter of 2020 comfortably beat quarterly profit forecasts. It raised its dividend after drafting plans to shrink its oil and gas operations while transitioning to low-carbon energy.

The ambition is to become a net zero-emissions company by 2050 or eventually sooner. The positive surprise is that the company is raising the dividend by about 4% this quarter in a sign of revived confidence.

Shell also intends to cut up to 9,000 jobs, or more than 10% of its workforce, to reduce costs. Finally, the company planned a long-term strategy to cut debt to $65 billion, which is a priority, in my opinion. CEO Ben Van Beurden said in the conference call:

we’re also announcing a target milestone for our net debt of $65 billion for the near term. And once we have achieved this milestone, we target to further increase shareholder distribution.

Technical Analysis

RDS.B forms a descending wedge pattern with a resistance range of $24-$24.25 and support between $21.50-$21.75.

The trading strategy is to sell at resistance a small part of your position and wait for a retracement to accumulate again. I believe it should be reasonable to sell about 15% of your position between $24 and $25.50 (50 MA) if the resistance is not crossed, pushing the stock to retrace below $22.

However, Shell is highly correlated to oil prices and future demand outlook. We are entering winter, and the virus pandemic is entering a second wave that could significantly affect the energy demand. In this case, Shell could quickly drop below $21.

Conversely, if oil prices turn bullish (vaccines or else), we may retest $30-$31.

Watch oil like a hawk.

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Disclosure: I am/we are long RDS.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also trade short term RDS.B frequently.