The market appears to be willing to give Royal Dutch Shell (RDSB) a pass despite a big miss on fourth quarter earnings given improvements in cash flow and a reduction in borrowings. The shares are up 1.5% to £22.57.
This highlights the importance attached to the oil major's dividend. As we explained in this article, investment bank Morgan Stanley sees a reduction in the yield, as investors grow more confident in the payout, as key to further appreciation in the share price.
CASH IS KING
Earnings on a current cost of supply basis (the preferred measure) fell 44% in fourth quarter to $1.03bn from $1.84bn thanks to $500m of impairments linked to a weak Aussie dollar. Even stripping out exceptional items, earnings came in at $1.8bn, up 14% year-on-year but well below the consensus forecast of $2.79bn.
However, cash flow of $9.2bn was up from $5.4bn year-on-year and net debt fell from through the last three months of 2016 from $78bn to $73bn.
There has also been good progress with the group's $30bn divestment programme with deals announced Tuesday to sell $4.7bn worth of assets in the North Sea and Thailand and an earlier $820m sale of petrochemicals assets in Saudi Arabia.
Combined these transactions have brought in as much in the first weeks of 2017 as the group generated from disposals in the whole of 2016 and chief executive Ben van Beurden says $15bn worth of deals have been completed, agreed or are in progress.
QUARTERLY WEAKNESS
Interestingly a new piece of research by UBS on the big European oil and gas companies backs up 'conventional wisdom' that Shell often falls short with its Q4 numbers 'whether because of business mix, accounting practice or just coincidence'.
Shell's Q4 earnings misses | |
Quarter | Miss vs consensus |
Q407 | -2% |
Q408 | -6% |
Q409 | -4% |
Q410 | -13% |
Q411 | -5% |
Q412 | -11% |
Q413 | -28% |
Q414 | -28% |
Q415 | 4% |
Source: UBS |