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Analysis Shell (RDS) update Nov. 1st. 2019 

The following article is is not a recommendation or proposal to do anything. The data written in this article is not guarranteed. It is my private personal opinion. I`m not independing as I own a position of RDS shares. 

Royal Dutch Shell is a global integrated and one of the biggest oil & gas companies of the world with an average production of 3,6 mio. barrels of oil equivalent per day generating revenues of nearly 360 bn$/yr. a free cash flow of 40 bn$ and net profits of 20 bn$ or 2.5$/share

Shell is a company with a glorious past. Today it is a dividend is 47c/share each quarter since a couple fo years. The dividend yield exceeds 5%. A dividend rise seems possible next year (5)(18). The highlight is that the RDS B share is noticed on the LSE. There is no withholding tax applied in the UK. Hence you`ll get the full dividend paid on your account. The RDS A share is noticed in the Netherlands. It is less expensive as withholding tax is deducted. 

Risks & Chances

The dividend of RDS is a sword with two sides. RDS is informally committed not to lower the dividend and it did not do it since WWII. This gives reliability to retired shareholders but on the other hand it is a burden during oil&gas downturns. During the period of low oil prices 2015 - 2016 the dividend ate up more than the free cash flow increased depth, increased the number of shares by a script dividend option and kept RDS from taking opportunities as buying assets for low prices beside BG.

Integrated gas means gas production, terminals, liquidification and regassing plants... On my point of view LNG is an opportunity for the future. I assume that LNG might become a major energy source to power ships, engines, vehicles and homes not connected to the gas grid. As nearly all major oil companies invest in LNG it seems to outgrow demand and thus its profitability is decreasing actually. 

A major issue for all oil/gas companies is the falling gas price. It seems that production outpaces demand. A risk is that oil production outpaces demand as well and lower oil prices seems not unrealistic. It is forecasted that the demand growth in the oil market is < 1 mio. bl/d in 2019 and 2020. On the other hand there is some idle capacities as Iran, Lybia, Nigeria, Venezuela that are blocked by various political reasons. 

An opportunity for RDS in the long run is the downstream and the chemical sector. There is less politics (arbitrary decisions, nationalizations, sanctions) in the downstream sector than in upstream ex. Nigeria (4). Margins in the chemical and downstream sector are in average (fluctuations) quite well if the location of the plants is chosen well. The downstream and chemical sector is more stable than the upstream sector. 

RDS pays 3,9 bn$ dividends per quarter, bought back 2.5 bn$ shares in Q1/19 and Q2/19 each, made capital investments of 13 bn$ (H1/19) which exceeds the cash flow from operation. Debt increased by 16 bn$ in H1. This is not really sustainable. 

RDS invests nearly 30 bn $/yr (25bn$ 2018)(3). This amount is not sufficient to replace the depletion of the existing oil/gas reserves by new fields. 1- 2 bn $ of that is wasted to political investments see below. 

Bn boe                 2016    2017    2018

Production             1.4       1.4      1.4

SEC proved Res.    13.2      12.2    11.6

Res./Prod. yrs.       9.5         8.8     8.3 (10)

The price sensitivity of RDS is 6bn$ CFFO (0.72$/share) per 10$ fluctuation in Brent oil 

RDS management seems to be very saturated. On government and NGO pressure it committed to stop production in the Groningen gas field (the biggest in Europe and a big cash cow) by 2030 without compensation. A new hungry management team would be a great opportunity for RDS. 

RDS management invests 1 - 2 bn$/yr. in "renewable energies" as wind & solar(6)(11). It plans to increase this investment to 4 bn$/yr. (7). It is to worry that RDS will buy the utility Eneco for some 4 bn €. Renewable energies as solar & wind generate electricity according to the coincidences of the weather, daytime & season. The value of this electricity is close to 0. The earnings are generated by subsidies and regulation. Beside of the moral question to cheat the poeple the margins are by far lower than that of the oil&gas business. The political risk from elections and governmental changes are high. I suggest that the RDS managements saturation let them buckle to the pressure of green NGO (climate hoax)??. Further RDS is a member of the OGC a "climate" organization that works against the key interests of an oil/gas producer. The advantage of this nonsense activities is that investors with green investment criteria as the Norway's sovereign wealth fund or Legal & General invests in RDS(20). in opposite to some other oil companies as XOM(21)

RDS sold its Venzuela assets (2). RDS kept the assepts thru years of socialist ruling and suffered a lot. No investor will actually pay a good price for it. In the meantime it looks very much as if the socialist ruling comes to a collapse most probably sooner than later. A clever management would try to keep a foot in the door of the worlds largest oil reserves to be in a good starting position when the socialist ruling comes to an end.

I have the impression that the RDS management is not the most clever management on earth.

Observations

RDS is split in 3 divisions Integrated Gas, Upstream and Downstream. Integrated Gas is the biggest profit contributor, followed by downstream. 

 PERFORMANCE BY SEGMENT (earnings) mio.$

                                       Q1/2019          Q2/2019           Q3/19

INTEGRATED GAS              2,795             1,726                2,597

UPSTREAM                        1,706             1,335                1,722

DOWNSTREAM                  1,595             1,338                 2,574

CORPORATE                      (671)             (806)                  (663)

Speculation

A main play of RDS is the LNG market. Global demand for liquefied natural gas will rise 11% this year to 354M metric tons after climbing 9% in 2018 as new facilities increase supplies to Europe and Asia, Royal Dutch Shell says(12). Most analyst assume that the demand for LNG is outgrowing the supply in a few years. The analysts believe that a large share of this additional demand comes from China and India.

(3)

On my point of view China is getting more and more in a rivalty with the USA. There are conflicts about some islands in the Pacific and Taiwan. The USA is a major producer and potential exporter of LNG. Thus I do not think that China will increase its LNG import as much as analysts believe. I rather think they will support the deveolpment of domestic gas resources, promote the use of electicity (coal, nuclear) for heating similar to France and South Korea...coal for industrial heat... India has plenty of poor poeple that needs the least expensive energy. They do not care that much on pollution and not at all about the climate hoax. Thus they will rather promote coal. Potentially the demand will not outgrow supply and the profits from LNG might not fulfill analysts dreams. Actually it looks more like production outgrows demand.  

RDS biggest LNG project is the western Canada LNG export terminal. A LNG terminal is a main issue for the promotors of the climate hoax. The canadian government is political very green minded. Thats why the RDS LNG project and the pipeline from Alberta to feed it might face a  political risk difficult to evaluate (9).   

Imports of liquefied natural gas (LNG) for Japan's electric power sector are likely to decrease by up to 10% in 2019 following the return to service last year of five nuclear reactors, the US Energy Information Administration (EIA) said.(13).

Some Data

RDSB WKN: A0ER6S / ISIN: GB00B03MM408

Share              Issue                    Float                   Treasury

RDSA            4,332,474,849     4,244,662,769        87,812,080         

RDSB             3,745,486,731    3,733,998,448        11,488,283 

Total                                        7,978,661,217        Sept. 30/19

which would fall to 7,925,491,642 in 2020 after the buyback program has been completed". (1) The buy-back program has a volume of 25 bn$ completed end of 2020.

 

                                            2018       Q2/19         Q3/19     Est. 2019 

Production (mio. bl/day)         3.67        3.58            3.56        3.6

Revenues (bn$)                      397         91.8            89.5        360

Cash Flow (bn$)                       53          11              12.3         40

Net Profit (bn$)                       23.4        3                5.88         20

EPS/c                                     280        0.37             0.73         2.5

 

Ownership RDS A (market screener (16)):  

Name                                                                                                         %

Nederlands Centraal Instituut Voor Giraal Effectenverkeer BV                        40.1%

BlackRock Investment Management (UK) Ltd.                                              4.78%

The Vanguard Group, Inc.                                                                          3.32%

Franklin Advisers, Inc.                                                                               2.99%

Legal & General Investment Management Ltd.                                              2.81%

Norges Bank Investment Management                                                         2.57%

State Street Global Advisors Ltd.                                                                 2.43%

 

BlackRock Fund Advisors                                                                             2.40%

Ownership RDS B

Name                                                                                                       %

Capital Research & Management Co. (Global Investors)                              8.05%

BlackRock Investment Management (UK) Ltd.                                           3.78%

The Vanguard Group, Inc.                                                                       3.17%

Qatar Holding LLC                                                                                  2.34%

Legal & General Investment Management Ltd.                                         2.15%

Norges Bank Investment Management                                                    2.04%

Capital Research & Management Co. (World Investors)                            1.82%

State Street Global Advisors Ltd.                                                          1.82%

Holdings: 

Name                                                       Equities               %            Valuation

Shell Midstream Partners LP (SHLX)           99,979,548          44.7%    1,640,664,383 USD

Pilipinas Shell Petroleum Corp (SHLPH)      890,860,233        55.2%    808,945,635 USD

Viva Energy Reit Ltd (VVR)                       276,060,625        38.0%    437,280,030 USD

Hankook Shell Oil Co., Ltd (002960)           700,000              53.8%    211,104,138 USD

Showa Shell Sekiyu K.K.                           14,284,000          3.83%    199,344,790 USD

Shell Pakistan Limited (SHEL)                    81,443,702          76.1%    179,903,437 USD

Shell Oman Marketing Company SAOG      43,800,000          46.1%    168,942,732 USD

Net Debt: 127 bn$ (end of 2018)(14)

Some News

2019/09/10 A comment written on the claim that the Dutch Government plans to close Groningen in 2022 ...

Groningen produces 25 bn m3 gas annually. That means 3.8 bn € (4 bn $) revenues annually. The operating costs of a 65 year old field with written off equipment is low. That means it generates a cash flow of perhaps 2bn € annually. 

 
The region of Groningen is the most sparsely populated area of the Netherlands. If there are some damages to housing and public properties  lets say 5000/year 50000 € each it is a damage of 250 million € that can be paid easily from the cash flow. 
 
If the government closes the field I hope that RDS does not buckle to the government as they did in the past but stands up and fight for compensation.  

 

2019/08 RDS intends to buy ERM Power. It is one of the largest commercial and industrial electricity retailers in Australia. ERM operates a gas fired power plant (24)

2019/06 RDS sells ist Martinez refinery, in central California near San Francisco, to PBF Energy Inc. For USD1 billion. The Martinez refinery has a capacity of 157,000 barrels per day, producing gasoline, diesel, and jet fuel, amongst other products. 

The West Coast refining market had very good margins in the past. It provides a constant cash flow and thus the decision is not easy to understand.  

2019/05 The Quest CCS facility captures and stores about one third Alberta, (4 mio. tons) of the CO2 emissions from the Shell operated Scotford Upgrader near Fort Saskatchewan, ,which turns oil sands bitumen into synthetic crude that can be refined into fuel and other products. The CO2 is transported through a 65km pipeline and injected more than two km underground below multiple layers of impermeable rock formations. The question is who pays for this green nonsense! (17)

RDS is going to develop a new shale oil field in Argentina..that is planned to produce of 70K boe/day by 2025 (8)

Some Comments: 

2019 Sept. 12th The author seems to me more a green believer than an independent thinker. "Renewable Energies" does not exist in natural science. The name is perhaps chosen to show that these "energies" are bejond the limitations of technologies and economics. The electricity of dirty wind & solar power plants is generated acc. to the coincidences of weather daytime & season. In a grid where demand and generation needs to be in balance at any moment its value is about 0. The revenues from wind & solar depends completly on regulations and subsidies and at the end on the erratics of politics. Some left wing politicians create regulations and subsidies other more right wing politicians slash them sometimes even with backwardation. As there are many government controlled companies in the field the profit margins are lower than that of oil, gas and downstream. 

 
I would rather suggest that RDS should use its core competences in realizing huge long term projects in the field of gas & oil & downstream ideally in countries with stable legislation. Off shore gas fields in Australia, deep sea oil in Brazil, basic chemicals in countries with low feed stock costs. I`m very shure that there is as well in 30 years someone willing to pay for LNG, Diesel and Polypropylen. 

To Main Page

 

 

References:

(25) 2019/09/30 https://seekingalpha.com/news/3502635-shell-reports-q3-drop-upstream-production-lng-output-jumps

(24) 2019/08/27 https://www.nsenergybusiness.com/news/shell-energy-acquire-erm-power/

(23) 2019/08/04 https://www.shell.com/investors/financial-reporting/quarterly-results/2019/q2-2019/_jcr_content/par/toptasks_1119141760.stream/1564583782680/1a956d59dd376c7622d6060b182602c001c8c405/q2-2019-qra-document.pdf

(22) 2019/08/04 Effecten Spiegel 18.07.19 S3

(21) 2019/06/21 https://seekingalpha.com/news/3473007-big-u-k-investor-dumps-exxon-climate-change?dr=1#email_link

(20) 2019/06/13 https://seekingalpha.com/news/3471071-conocophillips-hess-cut-norway-wealth-fund

(19) 2019/06/12 http://www.lse.co.uk/AllNews.asp?code=l8xt7ys1

(18) 2019/06/04 https://seekingalpha.com/news/3468783-shell-sees-dividend-spending-boost-2020

(17) 2019/05/25 https://www.hydrocarbonengineering.com/the-environment/24052019/shells-quest-css-facility-reaches-co2-capture-milestone/

(16) 2019/05/22 https://www.marketscreener.com/ROYAL-DUTCH-SHELL-6273/company/

(15) 2019/05/02 https://seekingalpha.com/pr/17496544-royal-dutch-shell-plc-1st-quarter-2019-unaudited-results

(14) 2019/03/14 https://seekingalpha.com/article/4248616-will-royal-dutch-shell-raise-dividend?app=1&dr=1#alt2

(13) 2019/03/05 http://www.world-nuclear-news.org/Articles/Japan-LNG-imports-fall-as-nuclear-plants-restart

(12) 2019/02/24 https://seekingalpha.com/news/3436622-global-lng-trade-climb-11-percent-2019-shell-says-new-report?app=1

(11) 2019/02/15 https://www.londonstockexchange.com/exchange/news/alliance-news/detail/1550220939864467200.html

(10) 2019/01/31  https://seekingalpha.com/article/4237009-royal-dutch-shell-plc-2018-q4-results-earnings-call-slides?app=1&dr=1

(9) 07/01/2019 https://seekingalpha.com/article/4231726-shell-kitimat-lng-trouble-ahead?app=1&dr=1

(8) 18/12/28 https://seekingalpha.com/news/3419486-shell-start-major-project-argentinas-vaca-muerta-shale-play-next-year?app=1&dr=1#email_link

(7) 18/12/26 https://www.theguardian.com/business/2018/dec/26/shell-says-it-wants-to-double-green-energy-investment

(6) 18/12/19 https://www.pv-magazine.com/2018/12/19/shell-acquires-49-stake-in-singapores-cleantech-solar/

(5) 18/12/17 https://seekingalpha.com/article/4228793-shell-shareholders-expect-dividend-raise?app=1&dr=1

(4) 18/12/13 https://seekingalpha.com/news/3416820-shell-eni-face-1_1b-lawsuit-2011-nigerian-oil-deal?app=1

(3) 18/11/01 https://seekingalpha.com/article/4217047-royal-dutch-shell-plc-2018-q3-results-earnings-call-slides?app=1&dr=1

(2) 18/10/13 https://seekingalpha.com/news/3397017-reuters-shell-seeks-sell-venezuela-jv-stake-frances-maurel-and-prom?ifp=0&v=1539344700

(1)18/10/02 https://seekingalpha.com/article/4209358-assessing-shells-potential-returns-higher-oil-prices?app=1&dr=1

18/10/01 https://seekingalpha.com/news/3394026-bloomberg-shell-partners-set-approve-31b-lng-canada-project?app=1

Comment

There are plenty of very selective analysis on RDS. If the RDS investor relation would write an analysis it would look similar. The main negative points are not mentioned.

 

The capex of RDS is not sufficient to replace the depletion of the reserves. Thus the oil reserves and potential future production are shrinking.

 

The management is very saturated let itself press by green lobby groups to activities not in the best interest of RDS stakeholders. 2bn$ out of about 30 bn$/yr capex is wasted on green nonsense.

 

RDS focus more and more on LNG. It is expected that China & India increase their LNG use significantly. On the other hand India is very poor does not care about environment nor at all on the climate hoax and will prefer the cheaper coal. China is in a rivalty to the USA the potentially biggest LNG exporter. I assume that China will not increase its LNG imports as forcasted. The LNG market will not grow in the pace forecasted.Many analysts forecast China & India to absorb all the LNG produced in the future. Very often they believe that these countries will change their energy system acc. to the climate hoax hypothesis.

 

It seems possible that there might develop a LNG oversupply situation.

 

 

Shell CEO urges collaboration in tackling emissions

https://seekingalpha.com/news/3504746-shell-ceo-urges-collaboration-tackling-emissions

The guy is wrong!
 
The industrial civilizations are based on the use of fossil fuel instead of muscle power. The wealth of industrial nations is linear to the use of energy. That`s why it seems very unlikely that many countries will follow the climate hoax* and its message to develop back to middle age. 
 
Oil, gas, LNG, plastics are products that provide comfortable profit margins. That`s why I would go on developing oil fields, investing in downstream activities and avoid green nonsense. Even if Western Europe develops back in direction of the middle age there are enough young industrial nations to suck the oil and gas offered. 
 
 
*The "climate change" or better climate hoax is based on a very poor once scientific hypothesis that is communicated excellently by green NGO and taken over by left politicians. 
 
 
 
 
A green communist** believer should indeed not buy XOM, or other oil or coal companies and perhaps no other stock.

 


The green religion demands its believers to reduce the global CO2 emissions by 80%. The US and Europe consume above average it is to reduce the CO2 emissions by 95% in the US and 90% in Western Europa. That means no heating, no AC, no motor vehicle, no electricity....like the middle age. Most probably no investor will earn any money in the long term if the world should develop acc. to the visions of these green communists.

 


The climate hoax* is popular in Western Europe and the coastal states of the US plus a few countries in Aisa. Worldwide there are perhaps 400 - 500 million green believers. On the other hand there are about 6 bn poeple on earth that don`t know, don`t care, don`t believe in the green religion and wish to live a life similar to the US middle class. Thus it seems very likely that there is someone who pays for oil, gas and coal in 10 - 20 or 30 years.

The best advice is: Drill baby drill!

 

 


*The "climate change" is based on a poor hypothesis communicated excellent and taken over by left socialist politicians in many countries. My analysis
holgernarrog.hpage.com/...

 

**Socialism and communism have shown each time they seized power that they can destroy a society or at least an economy from UDSSR, North Korea.... Most remarkable is that they managed to develop Venezuela the country with the biggest oil reserves to poverty.
 

 

 
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