Royal Dutch Shell plc (ADR) (ticker. RDS.A) seems to be getting its act together, and that may be just in time for nervous Shell shareholders.
Last month Shell announced the reinstatement of stock dividends and $25 billion worth of stock buybacks. The oil giant also is hiking its cash flow outlook from $25 billion to $30 billion by 2020, assuming that oil prices are at $60 per barrel, the company says in a statement. (Crude oil is at $57 per barrel, up from $48 per barrel in September.)
Shell plans to reduce its debt burden — the company’s ratio of corporate debt to shareholder equity was 25.4 percent at the end of the third quarter, and company officials want to get that to 20 percent. Its oil production performance is back on track, and Shell expects to be delivering 1 million barrels of oil per day in 2018.
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Additionally, Shell plans to generate $10 billion worth of cash flow from new projects (assuming crude oil stays higher than $60 per barrel) by 2018.
The company also states it’s “confident” of boosting organic cash flow over the next decade and paying dividends to shareholders (it hasn’t paid cash dividend for two years, opting instead to offer shares of company stock). It says it’s on track to cut operational expenditures by 20 percent, a process that began in 2014, even as it boosts spending on cleaner natural gas and electrical vehicle energy projects, mostly in Europe.
“Our next steps as we reshape Shell into a world-class investment aim to ensure that our company can continue to thrive, not just in the short- and medium-term but for many decades to come,” says Ben van Beurden, chief executive officer at Shell in a statement. “These steps build on the foundations of Shell’s strong operational and financial performance, and my confidence in our strategy and our ability to deliver on the promises we make.”
In a philosophical shift, van Beurden says Shell is moving away from an emphasis on “engineering wonders” and toward a business model that favors “financial outcomes.”
Given a fairly significant pivot, should energy investors get on board the Shell bandwagon?
Most of the energy analysts who cover Shell believe so — 29 analysts who track the stock view it favorably, and who see an annual growth rate of 10.85 percent by 2020, which would boost earnings from 58 cents per share to $2.32, according to data culled by James Harlett at Simply Wall Street.
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Even further down the line, Shell looks to be a strong market play, especially when a robust overseas business outlook is factored into the equation.
“With Shell recently completing the sale of some very high-value assets, they are growing in other regions, including the [floating production, storage and offloading] unit off of the Brazilian coast,” says Christopher Melillo, managing partner and energy expert at Kaye/Bassman International Corp., in Plano, Texas.
Melillo notes that Shell and its partners have landed several offshore contracts with lifespan greater than 35 years, which will create some employment opportunities and the technical and professional levels.
“We also expect to see continued job growth related to cleaner energy commitments that have been made by the organization along with several other major energy companies worldwide,” he says. “However, we do not expect to see an overabundance of job growth within the organization that would have any type of negative effect pulling down on 12-month profit expectations that would be anything more than business as usual operating costs.
“We still believe that Shell’s commitment to research and development, intelligent planning and overall financial management continues to make Shell a highly desirable firm.” Melillo says.
Energy companies like Shell should also benefit from a higher interest rate environment, a scenario that’s expected to grow more pervasive in 2018.
“The consensus opinion in the market is that interest rates will likely rise significantly in 2018, as the Federal Reserve is expected to pursue a more restrictive monetary policy,” says Robert R. Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennslyvania.
According to the CME’s FedWatch Tool, which looks at trading in the futures markets, by next June there is a 77 percent probability that the target Fed Funds rate will be at least 50 basis points higher than today, Johnson says — and that should boost Shell and other major energy producers.
“From 1966 through 2014, the S&P 500 returned 15.2 percent when rates were falling and only 5.7 percent when rates were rising,” Johnson says. “But not all sectors performed equally poorly when rates were rising. In fact, the best-performing sector in a rising rate environment was energy, returning 11.2 percent compounded annually.
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“With energy stocks having been so out of favor in the recent bull market, the energy sector is ripe for solid returns relative to the market in a rising interest rate environment,” Johnson says.
Shell is trading at about $64 per share, with a one-year target of $69 per share, according to a consensus figure from analysts who follow the company.
But with Shell shifting into higher gear on multiple financial fronts, and with strong revenues coming from its benchmark deep water and chemicals divisions, don’t be surprised if Shell rises higher than that, and helps the take the oil production sector along for the ride.
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Is Royal Dutch Shell plc (ADR) (RDS.A) on Track for Gains? originally appeared on usnews.com
