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Can Royal Dutch Shell’s Cash Flows Remain Consistent?

A tanker truck enters a Royal Dutch Shell Plc facility in Loving County, Texas, on Monday, Dec. 17, 2018. (Photographer: Angus Mordant/Bloomberg)© 2018 BLOOMBERG FINANCE LP

Royal Dutch Shell (NYSE: RDS.A), saw profits surge in the last quarter, as improvements to capital efficiency has meant the company reported a strong quarter. With oil prices falling into the twenty’s a couple of years ago, Shell decided to re-focus its strategy. Previously it had focused on acquiring assets, and paid little attention to quality. When the oil prices fell, it had to quickly re-strategize to keep profitability up, and the strategy has paid off. Gas and exploration income almost doubled from the previous year, and the upstream segment of the company saw significant increases. Along with the increase in income, profits almost tripled from the previous year .

We have a price estimate of $67 per share for Royal Dutch Shell, which is 10% higher than its current market price. View our interactive dashboard – Royal Dutch Shell In 2019 and modify the key drivers to visualize their impact on its valuation.

Shell has significantly tightened how it allocated capital in 2018. Capital Expenditure (capex), has remained steady through 2018, and is at similar levels from 2017. Capex is expected to continue into 2019. This means Shell will weather any major prices changes in oil, far better than previous years, where it wasn’t prepared for an oil collapse. The volatility in oil could be a reason why the stock remains muted, as investors look for consistent quarterly results before investing in the stock. But with capital expenditure tightening, we expect free cash flow to come in at $20 billion in 2019, up from ~$16 billion in 2018. The company’s average realized price for 2018 has been $65, and we are currently expecting a similar average realized price in 2019.

Currently the stock trades at a price of $60, and our price estimate is at $67, should cash flows come in strong as expected, we could see the price of the stock achieve much higher levels, with the stock reaching as high as $73 which is illustrated in in our chart labeled (share price), and our dashboard. But for the stock’s price to rise to $73, the company would have to show 2-3 quarters of consistent results. With OPEC expected to keep a tight lid on supply, we expect oil prices to remain steady. Overall, Royal Dutch Shell’s stock is well placed to go higher in 2019.


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