Shares of Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) soared in the last two days after its Chief Executive Officer Ben van Beurden provided on Tuesday, June 7, an update on the company's strategy, that according to the company, sets a clear course for stronger returns and free cash flow. Shares of RDS.A have increased 6.43% in the last two days and shares of RDS.B have risen 6.58%.
Since the beginning of the year, RDS.A's stock is already up 15.7% while the S&P 500 Index has increased 3.7% and the NASDAQ Composite Index has lost 0.7%. However, since the beginning of 2012, RDS.A's stock has lost 27.5%. In this period, the S&P 500 Index has increased 68.5% and the Nasdaq Composite Index has risen 91%.
RDS.A Daily Chart
RDS.A Weekly Chart
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The recent rebound in the price of oil has caused the prices of all five supermajor oil & gas companies to rise. The average price increase of the group in the last 13 weeks has been 10.39%; RDS.A has shown the highest increase in this period of 11.90%. However, only Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and TOTAL (NYSE:TOT) have achieved a positive return in the last 52 weeks (including dividend), as shown in the table below.
In its first long-term strategy presentation since February's $54 billion acquisition of BG, Shell unveiled plans to limit spending and exit countries in order to focus on the most profitable operations such as liquefied natural gas [LNG], deepwater oil production and chemicals. The company also detailed longer-term plans to grow its shale oil and gas production and green energy as it switches to cleaner resources. In Tuesday's investor meeting CEO Ben van Beurden said:
I see important opportunities for Shell from the substantial and lasting changes underway in the energy sector. We expect to see robust demand for oil and gas for decades to come, in a global energy system in a long-term transition to lower carbon fuels. As well as low oil prices today, we are seeing higher levels of price volatility, due to geopolitical change, the speed of information flows, and the pace of innovation in our sector. By capping our capital spending in the period to 2020, investing in compelling projects, driving down costs and selling non-core positions, we can reshape Shell into a more focused and more resilient company, with better returns and growing free cash flow per share. All of this is underpinned by an unrelenting focus on safe and environmentally-responsible operational performance, high quality and commercial project execution and prudent financial management of the company. The BG deal is an opportunity to accelerate the re-shaping of Shell. Integration is gathering pace, and today we expect to deliver more synergies, and at a faster rate.
Dividend and Share Repurchase
As many investors are holding Shell's stocks for the generous dividend currently yielding 7.10% for RDS.A and 7.03% for RDS.B, it is important to deduce from the company's investor meeting if Shell intends to continue keeping its high dividend payment. Although CEO van Beurden has not explicitly guaranteed the current dividend rate, in my view, we can learn from the company's new strategy that the dividend is sustainable. The plan provided long-term guidance on cash generation and relieved some concerns related to the BG acquisition by an 80% increase in the original synergies to $4.5 billion, as van Beurden said:
With our continued strong focus on returns and growth in free cash flow per share, I want to create a world-class investment case for Shell shareholders.
However, as I see it, the share buyback program of $25 billion between 2017 and 2020, which was originally announced with the BG deal, will depend on the performance of the disposal program and oil price.
Shell has confirmed its intention to pay a dividend of at least $1.88 per A share in 2016, currently yielding 7.10% (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. The company has a long record of continued raising of its dividend. The annual rate of dividend growth over the past three years was at 3.2%, 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.
Shell defined deepwater and chemicals as its growth priorities. According to the company, Brazil and the Gulf of Mexico represent the best real estate in global deepwater. Shell is developing competitive projects there based on that advantaged acreage. The company said that its deepwater production could double to 900,000 barrels of oil equivalent per day in 2020, compared with 450,000 barrels per day in 2015. This development should be very encouraging for the struggling offshore drilling companies like Ensco (NYSE:ESV), Seadrill (NYSE:SDRL), Transocean (NYSE:RIG), Diamond Offshore Drilling (NYSE:DO) and Atwood Oceanics (NYSE:ATW), among others. Offshore drilling companies have experienced weaker demand driven by a reduction in exploration spending, as major oil companies have drastically cut their exploration spending due to lower crude oil prices, which have lowered rig utilization and day rates. However, although deepwater offshore oil exploration is a high-costs and high-risk business, the fact that Shell considers it as one of its growth priorities should indicate that deepwater exploration still has high growth prospects. According to Total, its prospective studies show that the oil and gas held in deepwater reserves may amount to nearly 350 billion barrels of oil equivalent or 8% of the world's resources. Total also believes that two-thirds of deep offshore oil and gas resources are still waiting to be discovered.
Oil prices have shown a significant rebound in the last five months. As such, we can expect much better results for Shell's upstream operations in the forward quarters. The last price of Brent crude oil $52.39 per barrel is already up 66.2% from its 12-year low on January 20 of $31.52, while WTI crude oil last price of $51.25 per barrel is up 57.5% from its January 20 low of $32.54.
According to OilPrice.com, market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year. Oil fundamentals continue to improve. Last week storage levels in the U.S. fell by another 1.4 million barrels, the first time that the U.S. has posted consecutive weeks of declines in a long time. Also, U.S. oil production fell by yet another 32,000 barrels per day last week. U.S. oil output is already down by more than 900,000 barrels per day from last year's peak at nearly 9.7 million barrels per day.
Brent Crude Oil, August 2016 Leading Contract With 50-Day Moving Average
WTI Crude Oil, July 2016 Leading Contract With 50-Day Moving Average
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In its Tuesday, June 7, investor meeting, Shell offered a very encouraging update on the company's strategy, which sets a clear course for stronger returns and free cash flow, which caused its shares to soar. The plan provided long-term guidance on cash generation and relieved some concerns related to the BG acquisition by an 80% increase in the original synergies to $4.5 billion. Oil prices have shown a significant rebound in the last five months. As such, we can expect much better results for Shell's upstream operations in the forward quarters. According to OilPrice.com, market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year. 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 7.1%. In my view, we can learn from the company's new strategy that the dividend is sustainable.
Disclosure: I am/we are long RDS.A, ESV, SDRL.
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.