This morning both Royal Dutch Shell and BP. updated the market. A little unusual for these company to provide updates on the same day, cue conspiracy theorists if you will. The share prices couldn’t have reacted differently – at the time of writing BP is down 10.6gpx to 473 (-2.19%) whilst Shell has risen 83.5gpx to 2198 (+3.9%).
The results do reflect the nature of the results – BP, whilst having beaten market expectations in posting underlying replacement cost profit (its preferred measure) of $933m is wallowing at 50% of last years figures, and has been punished by the markets accordingly. It was also been noted that BP’s profit was boosted by lower taxes, and that its upstream division’s results had fallen short of expectations.
Shell on the other hand posted results that blew expectations out the water. Profit adjusted for one-time items were up 17% from 2015 levels to $2.79 billion. The average analyst expectation was cited by Bloomberg at $1.79 billion.
Shell is clearly making good headway into synergies with the newly acquired BG Group, the acquisition of which is responsible for the companies net gearing ratio standing at a dangerously high 29.2%. BG is responsible for 800,000 barrels of oil per day currently being pumped by Shell, according to Chief Financial Officer Simon Henry. He went on to say “We are now seeing the benefit of the acquisition on the bottom line,” he said. BG had “positive earnings and small positive free cash flow in the third quarter.” Hopefully we will see further benefits of the BG acquisition as we move into 2017 with the positive cash flow assisting in keeping dividend levels maintained.
Shell expects capital investment to be in the region of $25 billion in 2017, the very bottom of its $25 to $30 billion guidance previously issued, and well below 2016’s estimated $29 billion.
Both Shell and BP have warned investors not to expect the price of oil to rebound dramatically in 2017, and state that current levels are here to stay for the foreseeable future. Both companies are planning for prices per barrel in the low $50s in 2017, making it abundantly clear that they do not expect to see a return to the glory days of $100 a barrel oil. Certainly both companies are acting based on this message by tightly reigning in capital expenditure.
BP’s capital expenditure is estimated to be $15bn to $17bn in 2017.
Both Shell and BP reported dividends that were line with expectations. The companies clearly wish to maintain their reputations of dividend protect and growth, and debt is increasing to pay for it. Shell in particular has stated that it does not want to see its debt gearing ratio surpass 30% which, but it has not indicated what it will do to control debt without reducing its dividend.
My original research note on Shell can be found here:-
Given the protracted turbulence in the price of oil, and a failure for oil to hold above $50, I am reducing my target price for Shell by 10% £22.32, and I rate the company a hold. I have not yet conducted a fully research note on BP, and am likely to do so in the future.
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