INCORPORATED in the UK but headquartered in the Netherlands, Royal Dutch Shell is a multinational oil and gas "super-major". Shell employs more than 100,000 in its operations across the globe and generated operating earnings of about $30 billion (£1
8bn) in 2008.
As crude oil prices collapsed from their peak of $140 per barrel in July to $40 at the end of the year, investors grew increasingly concerned about the outlook for the major integrated oil companies. The subsequent decline in cash flows caused by lower oil prices puts pressure on the ability of these companies to maintain dividend growth.
However, thanks to its healthy balance sheet, Shell is well positioned to be able to continue increasing pay outs to shareholders.
Shell's first quarter statement showed cash balances of about 16bn (£14bn) and gearing of only 6.6 per cent, far below what management considers being an acceptable 20-30 per cent range.
The company is also aware of the need to reduce costs, and the new chief executive has taken steps to address this. During May, he announced the streamlining of Shell's "upstream, gas and power" and "oil sands" divisions into two businesses: Upstream America and Upstream International. This move will only yield modest cost savings but it highlights management's willingness to implement its plan.
Shell is trading at a discount to its sector on both a price-to-earnings and enterprise value-to-EBITDA basis. We believe that this is unjustified when the group's balance sheet flexibility, estimated 2009 dividend yield of circa 6 per cent, and restructuring process are taken into consideration. As oil prices have moved above $70, the market should have greater confidence in Shell's ability to deliver increased returns to shareholders.
• This article is for information and discussion purposes and does not form a recommendation by the manager to invest or otherwise.
