Royal Dutch Shell a global group of energy and petrochemical companies. I have a holding in my income portfolio (epic code: RDSB).
Shell announced their third quarter results today and they made for disappointing reading.
Third quarter sales were $116.5bn up 3.9% although earnings, on a CCS basis, were $4.2bn showing a decline of 32%. Earnings in the quarter were affected by a number of issues:
- significantly weaker industry refining conditions resulting in lower margins,
- increased Upstream operating expenses and exploration expenses,
- production volume reductions from maintenance and asset replacement activities,
- the impact of the challenging operating environment in Nigeria and
- lower dividends from an LNG venture.
Sales for the nine months were $342bn down 2% with earnings on a CCS basis of $14.6bn down 26.3%. Reported earnings for the nine months were $14.6bn down 27% and EPS $2.32 down 27%.
A dividend of $0.45 was declared an increase of 4.7% over last year and amounts to $1.33 for the nine months. The Sterling equivalent of the $0.45 will be announced on 6 December and paid on 23 December (xd 13 November).
Production in the third quarter was down 4% from the second quarter and showed a 1% decline in the nine months compared to last year.
Net debt was $22.8bn an increase of $3.6bn from the year end and gearing increased from 10.2% at the year end to 12.7%. FCF of $8.3bn ($13.3bn LY) was insufficient to pay for the dividend and share repurchases totalling $9.6bn.
This was a weak performance from Shell and follows uninspiring results at the interims. Shell need to consider rationing their capital expenditure that was already running well in excess of $30bn, but is now expected to top $45bn for this year, up from around $25bn just a couple of years ago. Some of these investments have been poor value and continue to erode equity with write-offs due to asset impairments ($234m written-off this quarter).
Reducing capital expenditure to below $30bn and using the capacity in the balance sheet (gearing currently 12.7%), would allow for a meaningful return of cash to shareholders. It is not often that I push for substantial share repurchases, but with the share price to book value at around 1.2, this would give meaningful returns to shareholders. It is worth noting that Shell has 39m more shares in issue than it did 5 years ago, the current long standing buy-back programme is essentially just offsetting the scrip dividend programme.
In another announcement today Shell announced their decision to proceed with its Carmon Creek project in Alberta, Canada, this is expected to produce up to 80,000 barrels of oil per day. Carmon Creek is 100 per cent owned by Shell and back in 2008 they took the decision to delay development of the tar sands due to the expense of extraction. I hope that in the meantime they have discovered ways to reduce the cost of extraction and achieve a good return on what will be a considerable investment.
Exxon also announced results today with a 14% fall in EPS and like Shell have suffered from the lower margins in refining, but on a quick look appear to have performed better than Shell in other areas.
It will be of interest to see the approach that the new CEO Ben van Beurden takes when he replaces Peter Voser in the New Year.