Oil prices climbed sharply yesterday, April 12, ahead of an oil-producers meeting to discuss an output freeze at January's levels. Major producers from the Middle East and Russia will attend the April 17 summit in Doha, Qatar. Russia's Interfax news agency quoted a diplomatic source in Doha saying that Russia and Saudi Arabia reached a consensus last Tuesday about an output freeze and that the final decision will not depend on Iran. Oil is trading up on shrinking U.S. shale production, a weak dollar, and anticipation of the Doha meeting.
Brent crude oil rose 4.34% on Tuesday while WTI crude oil increased 4.48%. Oil prices have shown some recovery in the last three months, which makes me think that the worst for oil prices is over. Brent crude oil last price of $44.30 per barrel is already up 47% from its 12-year low on January 20, of $30.14, while WTI crude oil last price of $41.65 per barrel is up 35.1% from its January 20 low of $30.83.
Brent Crude Oil, June 2016 Leading Contract With 50 Day Moving Average
WTI Crude Oil, May 2016 Leading Contract With 50 Day Moving Average
Charts: TradeStation Group, Inc.
As a result of Tuesday surge in oil prices, the prices of all five supermajors integrated oil & gas companies rose sharply, 2.31% on average. Royal Dutch Shell (NYSE:RDS.A) has shown the highest increase in the last 13 weeks among the five supermajors at 27.37%. However, only Exxon Mobil (NYSE:XOM) among the group has achieved a positive return in the last 52 weeks (including dividend), as shown in the table below.
Since the beginning of the year, RDS.A's stock is up 11.1% while the S&P 500 Index has increased 0.9%, and the NASDAQ Composite Index has lost 2.7%. However, since the beginning of 2012, RDS.A's stock has lost 30.4%. In this period, the S&P 500 Index has increased 63.9%, and the Nasdaq Composite Index has risen 87%.
RDS.A Daily Chart
RDS.A Weekly Chart
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Royal Dutch Shell is scheduled to report its first-quarter 2016 financial results on Wednesday, May 04, before market open. Trying to estimate Shell's earnings for the first quarter, I have calculated the average price of Brent crude oil, WTI crude, gasoline, natural gas and heating oil in the fourth quarter of 2015 and the first quarter of 2016. I also showed the last prices (April 13). The results are shown in the table below.
Although oil prices have climbed in the last three months, the average crude prices in the first quarter was about 23% lower than in the previous quarter. As such, Shell's upstream earnings which were $493 million in the fourth quarter of 2015 could turn into a loss in the first quarter of 2016.
Source: Company's reports
Considering downstream earnings, the decline in the prices of crude oil in the first quarter compared to the previous one was about 9% greater than the drop in the price of gasoline. However, it was about the same of the fall in the price of heating oil (heating oil is a part of the "distillate fuel oil" product family, which includes heating oil and diesel fuel). As such, we can expect a slightly better refining margin in the first quarter compared to the fourth quarter of 2015. Also, the natural gas price was about 15% lower than in the previous quarter. That should have contributed to improvement in the refining profit in the first quarter. Refiners use natural gas as an energy source for the process; cheap natural gas helps to lower production cost. All in all, I assume higher downstream earnings in the first quarter than the $1.524 billion obtained in the previous quarter. However, according to my calculations, the increase in the downstream earnings will be lower than the decrease in the upstream earnings.
Source: Company's reports
Shell has confirmed its intention to pay a dividend of at least $1.88 per A share in 2016, currently yielding 7.39% (each ADS represents two ordinary shares, two A Shares in the case of RDS.A). The current yield is historically high, which indicates that the stock is undervalued, according to some dividend assessment theories. In my view, this high dividend pay is sustainable. The company has a long record of continued raising its dividend. The annual rate of dividend growth over the past three years was at 3.8%, over the past five years was at 2.3%, and over the last ten years was at 7.8%. Even during the global economic crisis of the years 2008-2009, the company continued to raise its dividend. As such, it is hard to believe that Shell would break that many years tradition. Moreover, Shell has a strong balance sheet, and it generates free cash flows. Shell had cash and cash equivalents of $31.8 billion at the end of 4Q15, compared to $21.6 billion a year earlier. Cash from operating activities was $5.03 billion in 4Q15, compared to $9.4 billion in 4Q14. In addition, the recently completed BG deal is providing synergies in deepwater, LNG and upstream assets. The company sees cost synergies of $2.5 billion per year by 2018, and expects to generate cash from operations in the range of $55 billion - $70 billion by 2020; this compares with 2014 cash from operations of $45 billion.
RDS.A stock is trading below book value; price to book is at 0.98, and its price to sales ratio is very low at 0.74. The forward P/E is very low at 11.75, and the Enterprise Value/EBITDA ratio is also very low at 7.93.
Royal Dutch Shell is scheduled to report its first-quarter 2016 financial results on Wednesday, May 04, before market open. According to my calculations, Shell's upstream earnings which were $493 million in the fourth quarter of 2015 could turn into a loss in the first quarter of 2016. I assume higher downstream earnings in the first quarter than the $1.524 billion obtained in the previous quarter. However, the increase in the downstream earnings will be lower than the decrease in the upstream earnings. Oil prices have shown some recovery in the last three months, which makes me think that the worst for oil prices is over. Investing in a supermajor integrated oil & gas company like Royal Dutch Shell will give investors a significant price appreciation when oil prices recover along very generous dividend yielding about 7.4%. Moreover, Shell has confirmed its intention to pay a dividend of at least $1.88 per A share in 2016.
Disclosure: I am/we are long RDS.A.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.