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Shell share price: Analysts flag concerns over group’s debt pile

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by Mary MorleyTuesday, 02 Aug 2016, 10:38 BST

The latest fall in oil prices has revived concerns about Royal Dutch Shell’s (LON:RDSA) debt pile, analysts at RBC have said. The comments follow the oil major’s second-quarter results last week when the Anglo-Dutch group posted a hefty drop in profits.

Shell’s share price has fallen into negative territory in today’s session, tracking crude lower. As of 10:09 BST, the shares were changing hands 1.85 percent in the red at 1,853.50p, underperforming the benchmark FTSE 100 index which currently stands 0.77 percent lower at 6,642.68 points. The group’s shares have been little changed over the past year, and are up by more than a fifth in the year-to-date.

The Financial Times quoted analysts at RBC as commenting yesterday that while investors had become more comfortable with Shell’s purchase of former London-listed peer BG Group, the weak oil price had shifted attention to the enlarged group’s $75 billion of net debt and its reliance on disposals.

“Given limited room to manoeuvre on the balance sheet and the potential for more one-offs to be negative as we head through 2016 and early 2017, we think net debt likely grows over the coming quarters before it contracts,” the analysts pointed out, as quoted by the newspaper.

While Shell has a limit of keeping its net debt below 30 percent of its total capital, RBC expects the FTSE 100 group to break that limit next year if oil remained at $40 a barrel, and to remain cash flow negative even at $50 a barrel, even after factoring in $12 billion of divestment proceeds over the next two years. The analysts further noted that while the Anglo-Dutch major’s dividend should be safe, its investment credit rating looks vulnerable.

The comments come after Shell updated investors on its performance last week, posting a 72-percent drop in second-quarter earnings, pressured by weak commodity prices and costs related to BG’s acquisition.

As of 10:40 BST, Tuesday, 02 August, Royal Dutch Shell Plc ‘A’ share price is 1,856.25p.

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