Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q13 Earnings Update
Prev. Ed.: Feb 11, 2013; 4Q12 Earnings Update
Brokers’ Recommendations: Neutral: 100.0% (3 firms); Positive: 0.0% (0); Negative: 0.0% (0) Prev. Ed.: 4; 1; 0
Brokers’ Target Price: N/A (previous target price was $80.75) Brokers’ Avg. Expected Return: N/A
NOTE: Though dated Jun 14, 2013, broker material are as of Jun 11, 2013.
Note: A flash update was done on May 2, 2013; 1Q13 Earnings Update
A flash update was done on Feb 26, 2013; Shell to Buy Repsol’s LNG Property
Portfolio Manager Executive Summary
Royal Dutch Shell plc (Shell) is a holding company, which owns, directly or indirectly, investments in the numerous companies constituting the group. Shell is engaged globally in all the aspects of the oil and natural gas industry. It has interests in chemicals, as well as interests in power generation and renewable energy. The segments of the company are Exploration & Production, Gas & Power, Oil Sands, Oil Products and Chemicals.
All of the 3 firms covering the stock provided neutral ratings. Target price was not provided by any of the firms.
The following is a summarized opinion of the diverse brokerage viewpoints:
Neutral or equivalent (100.0%; 3/3 firms): The firms believe that challenging macro conditions will likely prevail, given the weak energy demand and the excess market capacity. In the near term, despite oil prices remaining stable and demand for petrochemicals increasing, refining margins, oil products demand, and spot gas prices are expected to remain under pressure. Additionally, significant project slippage and cost inflation might lead to delay in production and approval of new major projects. However, with signs of an improving economic outlook, the company will continue to focus on cash flow growth, underpinned by new exploration activities and lower costs.
June 14, 2013
Overview
Based in The Hague, Netherlands, RDS (RDS-B) is a large integrated oil and gas exploration, production, refining, and marketing company with operations and assets worldwide. The original Royal Dutch/Shell Group resulted from the 1907 alliance between UK-based Shell Transport and Trading Company and the Netherlands-based Royal Dutch Petroleum Company, with each having a 40% and 60% stake in the group, respectively. However, both the companies maintained their separate and distinct identities. The unification plan proposed in 2005 by the boards of both the companies was completed in 2006, resulting in one parent company, Royal Dutch Shell plc. Reflecting the 60:40 ownership structure of the group before the unification, Old Shell Shareholders were given a 40% stake through class B shares (RDS-B) while the Royal Dutch Petroleum Company’s shareholders were given a 60% stake in the new parent company through class A shares (RDS-A). The new company has a single Board of Directors, chaired by a non-executive chairman. Moreover, the group’s previously split central offices were consolidated into a single headquarter in the Netherlands, where the Board and the senior management team are based. Both the classes of shares have been listed on the London, Amsterdam, and (in the form of ADRs) New York stock exchanges. The company is negotiating with the Dutch government for changes in the corporate tax law that would ultimately allow the merger of the two stocks into one under the ticker RDS.
Segmental reporting has been changed with effect from 3Q09, in line with the change in the way Shell's businesses are managed. Shell reports its business through three (previously six) reporting segments, Upstream (previously Exploration & Production, Gas & Power and Oil Sands), Downstream (previously Oil Products and Chemicals), and Corporate. Corporate represents the key support functions, comprising holdings and treasury, headquarters, central functions, and Shell insurance companies.
The company employs approximately 87,000 people and works in more than 70 countries and territories. Additional information on the company is available at www.shell.com. The company operates on a calendar year basis.
The firms have identified the following factors for evaluating the investment merits of RDS.B:
Key Positive Arguments / Key Negative ArgumentsFundamentals
· Solid balance sheet with a stable dividend yield
· Ongoing restructuring of portfolio with disposal of non-core assets
Competitive Advantage
· Improving cash generation through an active cost cutting program
· One of the largest LNG players in the world
Growth Opportunities
· High crude oil prices accelerating cash flow
· Capital expenditure program is likely to help restore long-term growth / Fundamentals
· Low refining margins
· Short reserve life
· Production execution risks
· High capex on long-term upstream projects
Macro Issues
· Volatile oil and gas prices
· Geopolitical risks associated with worldwide operations
· Risk of government intervention/regulation
· Slow recovery of the global environment
· Physical threats to infrastructure associated with Shell's production/exploration
· Heavy reliance on large technically challenging projects
June 14, 2013
Long-Term Growth
Shell’s long-term growth is contingent on its ability to reduce operating costs and achieve meaningful reserve replacements, according to the firms. With one of the shortest reserve life among its peer groups, the company has significantly less visibility. Though material acquisitions to replenish reserves would improve the growth outlook, it appears unlikely in the current macro environment. However, new projects for building LNG capacity are in progress, giving some visibility on long-term prospects. The firms believe that the company’s high exposure to Asian growth markets will drive earnings growth over the next several years.
According to the firms, Shell offers long-term visibility for volume and cash flow growth aided by a rich portfolio of projects across the globe including the recent Gulf of Mexico finds and the Qatar gas to liquids (GTL) venture. Shell has currently got hold of new offshore acreages in Canada, Malaysia, Tanzania and the U.K. North Sea along with exploration opportunities in the Orange Basin, South Africa. The company also gained access to onshore positions in Albania, Argentina, Canada, and China.
The company is committed to deliver a long-term competitive performance, both in terms of profitability and payout. Shell has balance sheet flexibility to maintain investment and grow dividends in the downturn, and fund future growth projects. Shell makes long-term investments to create long-term shareholder value.
The company continues to focus on delivering strong operating performance and maintaining the financial flexibility to fund both new projects and returns to shareholders. According to management, the industry outlook remains challenging, despite the rally in oil prices in the past few months. Management is taking steps to improve performance, to bridge the company and shareholders, into a period of significant growth in the coming years. The company with a leading position in LNG, GTL production, biofuels market and number of completed innovative ultra-deepwater and arctic upstream projects is set to sustain its growth momentum moving forward.
The firms believe that the company offers a lucrative investment opportunity for investors, based on effective cost-saving program, diversified portfolio of development projects that offer attractive long-term benefits and improvement in cash flow generation, owing to ramp-up and start-up of various projects. Shell is also expected to benefit from strong financial flexibility generated by various asset sales.
June 14, 2013
Target Price/Valuation
Provided below is the summary of valuation and ratings as compiled by Zacks Digest:
Rating DistributionPositive / 0.0%↓
Neutral / 100.0%↑
Negative / 0.0%
Average Target Price / N/A
Digest High / N/A
Digest Low / N/A
Number of Firms providing price target/Total / N/A
Risks to the price target include volatile oil and gas prices, drilling, and production results, successful restructuring, and regulatory and geopolitical risks.
Recent Events
On May 8, 2013, Royal Dutch Shell declared its decision to invest in the development of the ultra-deepwater project in the Gulf of Mexico’s Stones field. It is anticipated that during the first phase of the project the peak production will be roughly 50,000 barrel of oil equivalent per day (boe/d)
On May 2, 2013, Royal Dutch Shell reported strong first-quarter 2013 earnings on the back of higher natural gas prices and stronger refining margins.
The Hague-based Shell reported earnings per ADR (on a current cost of supplies basis) – excluding one-time items and gains or losses from inventories – of $2.38. This was above the Zacks Consensus Estimate of $2.07 and the year-ago adjusted earnings per ADR of $2.34.
However, Shell’s revenues were down 5.9% to $112.8 billion amid depressed oil prices.
On May 2, 2013, Royal Dutch Shell reported that it will pay $0.45 of dividend for 1Q13. The dividend represents an increase of $0.02 as compared to the year-ago period.
On May 1, 2013, Royal Dutch Shell, which holds 44% of Basrah Gas Company, declared that Basrah Gas Company has started operating in Iraq. The project is expected to be one of the largest flare reduction developments in the world.
On Apr 30, 2013, Royal Dutch Shell declared that it has entered into a joint venture with Abu Dhabi National Oil Company (ADNOC) for the development of Bab sour gas reservoirs located in Abu Dhabi. Royal Dutch Shell will have a 40% stake while the remaining 60% will be with ADNOC.
On Apr 15, 2013, Royal Dutch Shell reported that it is planning to divest Retail, Aviation, and Supply and Distribution Downstream units, which are based in Italy.
On Apr 4, 2013, Royal Dutch Shell declared that it has decided to divest its Australia-based Geelong Refinery, which has a capacity of 120,000 barrels per day.
On Apr 4, 2013, Royal Dutch Shell reported that it will invest roughly few hundred million dollars in prominent firms of technology. The investment is mainly to improve the company’s upstream operation techniques.
On Mar 5, 2013, Royal Dutch Shell reported that it is planning to invest in two liquefaction units at Great Lakes and the Gulf Coast region, in order to serve its marine and road customers with LNG.
On Feb 26, 2013, Royal Dutch Shell agreed to buy certain LNG properties from Repsol SA, based in Spain. The assets are located in Peru and Trinidad & Tobago.
Royal Dutch Shell will pay roughly $6.2 billion for the transaction, of which $4.4 billion will be provided in cash and the remaining $1.8 billion will be assumed as balance sheet liabilities. Included in the deal is Royal Dutch Shell’s commitment to provide roughly 0.1 million tons per annum (mtpa) of LNG for 10 years, to Canada based Canaport LNG terminal of Repsol.
The Repsol asset acquisition is expected to increase Royal Dutch Shell’s LNG volume by roughly 7.2 mtpa, while helping the group to earn significant cash flows.
The acquisition is expected to close by the second half of 2013 or the first half of 2014, subject to regulatory approvals.
Revenue
Royal Dutch Shell reported total revenue of $112.8 billion in 1Q13 compared with $119.9 billion in 1Q12. Revenues in the quarter decreased 4.4% from 118.1 billion in 4Q12.
Segment Details
Upstream
In 1Q13, volumes averaged 3.6 million oil-equivalent barrels per day (MMBOE/d), essentially unchanged from the year-ago period. Natural gas volumes rose 2.7%, while crude oil output was down 2.5% from the corresponding period last year. Crude oil contributed approximately 46% of Shell’s total volumes, while natural gas accounted for the rest.
Production / 1Q13A / 4Q12A / 1Q12ACrude Oil (thousand b/d) / 1,640 / 1,640 / 1,682
Natural Gas (million scf/d) / 11,132 / 10,288 / 10,844
Total (thousand Boe/d) / 3,559 / 3,414 / 3,552
Production in the reported quarter compared with the year-ago quarter included volumes from new field start-ups and the continued ramp-up of existing fields, which boosted output by roughly 175 MBOE/d.
LNG equity sales volumes of 5.15 million tons were flat with the year-ago quarter, as contribution from the Pluto LNG development in Australia were offset by lower output from Nigeria LNG.
Price Realizations – During 1Q13, Shell’s worldwide realized liquids prices were 7% below the year-earlier level, while natural gas realizations increased by 8%. In particular, natural gas prices in North America jumped 19% from the last year’s level.
Downstream
During the quarter, Oil Products sales volumes were 6,004 thousand barrels per day (b/d) compared with 5,960 thousand b/d in 1Q12.
Refinery intake volumes increased 3.9% year over year to 2,890 thousand b/d in 1Q13. Refinery availability was 91%, down from 94% in 1Q12.
Chemicals sales volumes declined 11.0% year over year in 1Q13, while chemicals manufacturing plant availability moved down to 92% from 94% in 1Q12.
Project Updates
In Canada, Athabasca Oil Sands Project’s initial debottlenecking development is over. Shell is holding a 60% ownership of the Oil Sands Project. It is assumed that the development will add capacity of roughly 10,000 b/d.
In Nigeria, Shell has finally taken decision to invest, for the development of Erha North Phase 2 deep-water project, of which the company holds a 44% interest. At peak production, the project is anticipated to generate roughly 60 thousand barrels of oil equivalent per day (boe/d).
In Oman, Shell has brought the Amal Steam enhanced oil recovery project online. The company holds a 34% ownership in the development. It is estimated that the project will be able to produce roughly 20,000 b/d, at its peak production.
In the U.K., Shell acquired a 5.9% stake of Schiehallion field located offshore, which increased Shell’s ownership to 55%. Shell also finished the purchase of extra ownership of Beryl area fields and SAGE infrastructure, which increased Shell’s production in the area to 20,000 boe/d from 9,000 boe/d.
In the U.S., Shell, along with affiliates of Kinder Morgan, has decided to build an entity to construct a natural gas liquefaction plant at the LNG terminal of Elba Island. It is expected that Shell will own 49% of the company. The plant is expected to have a capacity of 2.5 mtpa.
In Singapore, Shell has decided to invest in its petrochemicals facility based in Jurong Island in order to expand its capacity there. Shell will own 100% of the investment.
Outlook
The neutral firms believe that Shell is favorably poised to increase production with the help from its strategic initiatives and generate additional cash in the coming years. The company’s projects in the deepwater Gulf of Mexico, Southeast Asia and Brazil along with LNG and GTL operations in Australia, North America and Asia will boost the volumes.