Royal Dutch Shell Group .com Rotating Header Image

Dividends On A Knife-Edge: Royal Dutch Shell And BG Group

Screen Shot 2016-02-20 at 08.46.47

Extracts from an article by Nigel Kelly: 19 FEB 2016

Summary

RDS acquired BG Group on February 15, 2016.

The BG shares have been delisted.

RDS/BG now yields over 7.5%.

$60B is required Annually to cover Capex, Debt, Dividend and other Cash Commitments.

Its Cashflow from Operations is only $30B.

Background

Royal Dutch Shell completed its acquisition of BG Group on Feb 15th 2016. The full year 2015 results for both companies have been released in recent weeks. I wanted to review the full years earnings reports and assess the dividend safety for the combined entity.

Is the RDS dividend safe for 2016 and beyond?

Overall RDS will have a cash deficit of $50B in 2016.

The $50B deficit will be funded by:

  1. $20B new debt
  2. $10B of proposed asset sales in 2016
  3. $5B indicated capex and synergy savings*
  4. $15B cash will thus have to come off the balance sheet

* Please note I have not accounted for the debt and interest repayments on the $20B and hence this part of my analysis is on the optimistic side of the fence.

I just about believe that RDS will pay its dividend in 2016, but I predict RDS will do a lot of damage to the balance sheet to maintain its dividend. Given the current oil price environment, it could well deplete the cash on its balance sheet from $40B to $20B over the course of 2016.

The combined commitments (after capex) of dividends, debt reduction and other various commitments will probably run in the $25B-$30B range for years to come.

RDS/BG needs to increase revenues to generate more free cashflow.

And I don’t see a share buyback happening any time soon despite what management might say.

Conclusion

Shell/BG is not quite adding up for me.

In the short term, it has zero Free Cashflow. It must issue debt or sell assets to pay a dividend and to pay down its debt commitments.

In the longer term, I am not confident the Free Cashflows will cover the substantial dividend and debt commitments of the business.

As such I sold off half my RDS Shell this morning at £16 per share.

I will consider re-entering the position in the event of a substantial price collapse or perhaps look at other oil stocks that have no M&A risk. Several beaten-up industrials like Emerson (NYSE:EMR), Boeing (NYSE:BA) and Eaton Corp (NYSE:ETN) offer compelling values with decent Free Cashflows that can cover strong dividend yields alongside good buyback policies.

I believe Shell is a risky investment for income investors.

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.

FULL ARTICLE

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

Comments are closed.

%d bloggers like this: