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Atlantic View – Streamlining and Resilience Have Laid The Foundations For Recovery at Shell #RDSB

Streamlining and Resilience Have Laid The Foundations For Recovery at Shell #RDSB
by John Woolfitt, Atlantic Capital Markets
Fundamentals and Statement Summary
Anglo Dutch oil giant Royal Dutch Shell (RDSB) today announced results for Q2 2020, which include impairments of $16.8 billion post-tax (6.1% of average capital employed), reflecting revised price and margin assumptions. Shell reported ‘very strong crude and oil products trading and optimisation results’ and a resilient marketing performance, and said it was on track to deliver cost reduction targets, with a $1.1 billion reduction in underlying opex compared with Q1 2020, delivering a reduction target of $3 – $4 billion. 

Adjusted earnings came in at $638 million, with $6.5 billion in cash flow from operations and $243 million of free cash-flow. Return on Average Capital Employed (ROACE) came in at 5.3%, while gearing is now at 32.7%. Total dividends distributed to Royal Dutch Shell plc shareholders in the quarter were $1.2 billion. An interim Q2 dividend of US$ 0.16 per A ordinary share and B ordinary share was declared.

Royal Dutch Shell Chief Executive Officer, Ben van Beurden said that Shell “has delivered resilient cash flow in a remarkably challenging environment.”

“We continue to focus on safe and reliable operations and our decisive cash preservation measures will underpin the strengthening of our balance sheet.”

He added that a number of new working practices had “accelerated digitalisation across the company”..while the oil giant’s high-quality integrated portfolio, disciplined execution and forward-looking strategy “enable sustained competitive free cash flow generation.” 

Chart and Technicals
Source Factset & Hargreaves Lansdown

RDSB shares suffered a precipitous COVID driven fall in February / March 2020, briefly touching below £9 per share – a 30+ year low. The stock recovered the 50-day moving average at the start of April, and intermittently held that level until late June. Given the stock is trading at these historic lows, if Shell recovers and holds the 50-day moving average, currently at 1264p, our next target will be the gently falling benchmark 200-day moving average, currently at 1,725p.

Summary and Atlantic View

A darling of the FTSE100, and up to recently, a cornerstone investment among leading fund managers, the COVID crisis has seen Shell battling a seemingly existential crisis on a par with the challenges face by the venerable oil giant during WWII. However, the company has delivered a remarkably resilient performance during the depths of the crisis, and as CEO Ben van Beurden said in his Q2 results statement video clip, cash preservation (£1.1bn reduction in opex), streamlining and digitalisation have all been prioritised during the quarter, and these will in turn enable sustained competitive free cash flow generation going forward. As travel and movement starts to pick up on the back of expectations of vaccines and effective testing measures for COVID, it is reasonable to expect that energy and resource companies will start to return to some semblance of normality. Historically Q3 has been a strong earnings quarter for Shell, and with the measures management have already taken to streamline the company, Atlantic Capital Markets are backing Shell as a recovery play, firstly to regain the moving 50-day level at 1264p, and shooting for the 200-day benchmark by the end of the year. There is the added dividend bonus to boot, and although the payout was cut from 47 cents to 16 cents in Q1, (same for Q2), investors can still pick up the stock and collect the Q2 payout before the August 13 ex-dividend deadline. Atlantic Rating: Buy.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
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