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Royal Dutch Shell Gearing Up To Stay ‘Fit For The Forties’

By Aisha Rahman: Jul. 31, 2017 6:49 PM ET

Summary

Q2 2017 saw better YoY profits. However, the same cannot be said for QoQ results, due to lower oil prices in Q2.

There were notable improvements in the cash flow position, and I expect this trend to continue on for the rest of the year.

As the company gears up to stay “resilient to market changes,” it is seeking to control its cost lines and step into the renewable energy business.

I had written an earnings preview on Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) a few days before the company posted its Q2 results for the year. I decided to do a spin-off article to that in response to their earnings announcement for the quarter, and talk about the tone the company has set for the rest of the year.

Q2 2017 Roundup

I won’t be going into too much detail of the results that were posted — you can click here to read them. However, there are some key highlights that I will point out and discuss.

First, Royal Dutch Shell managed to do exceptionally well on a YoY basis as profits grew by 31% from last year. This doesn’t come as a surprise to me since we all know that realized prices for liquids and natural gas were doing much better in Q2 2017 than they did in Q2 2016. However, as I had expected and pointed out in my earnings preview, QoQ results did take a hit as they declined by more than 50%.

I had stated that declining oil prices would be the major contributor to any dips in earnings posted by the company. The latest results also revealed that while oil prices did head south during the quarter, production also declined by ~6% QoQ, which was another factor that contributed to the weaker QoQ results for Royal Dutch Shell. There was definitely a lot of pressure in the quarter for the downstream segment to push harder than ever (since lower oil prices were bound to cause the upstream segment to report sluggish results). I’m glad that the downstream segment was able to pull through and lift the results up for the company.

The cash flow position was definitely a sight for sore eyes because it came in strong — both for cash flow from operating activities and for free cash flow. Free cash flow went from being in the red in Q2 2016 to posting a stellar improvement as it came in at $12.1 billion, reaffirming my belief that the dividend is safe (opposing the views of many who felt that dividends might be under threat). Although dividends have remained flat at $0.47/share, I’m glad that the stock continues to remain one of the highest dividend-yielding stocks in the industry (~6%), allowing it to maintain its position as a great income-yielding stock for a portfolio that’s been designed to serve as a retirement plan and pay your bills.

While on the topic of cash flows, I had raised concerns about the amount of debt that Royal Dutch Shell had piled onto its balance sheet. But the recent quarterly results pleased me as I was able to find a reduction in the debt loadfor the company. I foresee that this trend is likely to continue on in the upcoming quarters as well, adding to massive improvements in free cash flows of the company down the road.

What Does the Rest of the Year Look Like?

Tough — that’s what the rest of the year looks like. My earlier piece on Royal Dutch Shell already highlighted the slowdown in the rebalancing of the oil market, and the subsequent bounce back of oil prices to higher levels. The announcement of the company’s earnings was also accompanied by CEO Ben Van Beurden adding that they wish to have a company that remains “resilient to market changes.” In my opinion, that is another way of saying, “It’s going to be tough, but we will try to pull through.” I don’t have any doubts about Royal Dutch Shell’s performance. I’m expecting Q3 and Q4 to definitely come in better on a YoY basis. Plus, the integrated nature of the company and the fundamentals remain strong. In all, the future doesn’t seem gloomy.

Royal Dutch Shell has already made it public that they are aiming to follow a more disciplined approach. That’s become quite evident as news of job cuts has begun coming in, the impact of which will start reflecting on the company’s expense lines, compressing them to optimum levels in order to post better earnings throughout the rest of the year. This move comes in as Royal Dutch Shell holds a more conservative view on oil price recoveries where it doesn’t see prices peaking until the end of the decade.

So what, then, does Royal Dutch Shell plan on doing? As it makes itself “fit for the forties” — as per Van Beurden — Royal Dutch Shell is focusing on its renewable energy division, with investments ramping up to $1 billion a year annually until the end of the decade. As it becomes a contender for bidding for Equis Energy in a deal that is worth approximately $5 billion, Royal Dutch Shell is, in my opinion, hinting that while it expects its oil business to decline, it does wish to take center stage in more forward-looking businesses that are the future.

Conclusion

Although I cannot say with certainty that Royal Dutch Shell will post better QoQ results for the next two quarters, the results will likely remain favorable in terms of a YoY comparison. I’m sticking to my verdict of the stock being a good income-yielding investment in the short to medium term, with a chance of capital gains in the long term. The dividend itself is reason enough for many to hold on to the stock, and with expectations of free cash flow to improve over time, I at least am expecting some of these improvements to translate into shareholder rewards in due time.

Any softness in share prices could be considered a good entry point for dividend-seeking investors at this point. After that, you can just sit tight and collect your quarterly rewards. Share prices might take some time to post material gains for those interested in capital appreciation; hence, if that is what you are in search of, the oil sector as a whole might remain bearish for the rest of the year, so you should probably take your picks from other sectors. Let me know your thoughts on the results and how you see the future for Royal Dutch Shell in the comments section below.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

SOURCE

This website and sisters royaldutchshellplc.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

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