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Shell Management Believes They Delivered Results, Wall Street Doesn't

Feb. 01, 2013 2:17 PM ETShell plc (SHEL)25 Comments
Ray Merola profile picture
Ray Merola

How sentiment and perspective make a difference on Wall Street.

Let's take a look at the Royal Dutch Shell's (RDS.A) earnings release and conference call held on Thursday.

Shell senior management touted fulfilling the first year of their four-year financial growth plan. CEO Peter Voser outlined the plan objectives, its results, then capped it off by declaring the expectation of a five percent increase in the third quarter dividend.

Here's a summary slide from the conference call presentation:

(Click to enlarge)

Wall Street promptly threw up all over it, dissing the numbers and pounding the shares down about three percent. Shares are down again today.

Here's my take on the call, the results, and why Wall Street is fretting.

The Plan

Shell management had previously announced an ambitious, 2012-to-2015 financial growth plan. There are four cornerstones:

  • Improve operating cash flows between 30 and 50 percent versus the previous four-year period; the target is OCF of $175 to $200 billion over the period
  • Capital investment of $120 to $130 billion over the period; emphasizing the following three lines of business:

1. Integrated natural gas opportunities

2. Deepwater production

3. "Tight" hydrocarbon and shale resource plays

  • Maintain a strong balance sheet;
  • Link the cash dividend to the results

The goals and objectives are premised upon roughly $80 to $100/bbl oil prices. If the price stays towards the upper end of the range, Shell management states the spending and results will follow along their upper target ranges, too.

Here's a slide from the presentation outlining the Plan:

(Click to enlarge)

First Year Results

On the conference call, Shell management highlighted the first-year success of the plan and results. Indeed, Voser and CFO Simon Henry spent much more time on the long view than current quarter results.

The execs

This article was written by

Ray Merola profile picture
Individual investor focused upon a limited number of diversified stocks. Seeks stocks selling below fair value estimates; favors dividend growth and/or income. Advocates fundamental investment analysis, supplemented by the technical charts. Options strategies primarily employed to generate additional income or hedge risk. If interested, you may find out more about my investment philosophy in the I.S.S. (Investment Strategy Statement) found in my listing of published articles or via this link: Investment Strategy Statement - Ray Merola | Seeking Alpha

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Comments (25)

Thank you Ray! Finally someone who emphasizes the long-term direction of the company over quarterly results!
Ray Merola profile picture
Thank you for the kind words, SSnape

My guess is traders may jump on Shell in the near term because of ongoing concerns about their arctic exploration problems. May just be a chance for those with a longer view to accumulate a position at a discount.
Thank you for a fine and informative article.
I chose RDS.A just last week because of their low debt, LNG performance and the fact that they are proven innovators and visionaries.

Long RDS.A, XOM, CVX and SNP.
Below is a clip from an article in the Feb. 8th business section of the Calgary Herald that I believe raises a bit of a red flag on Shell's heavy exposure to NA gas and their investment in LNG. Is this just a ploy to get tax-payer funding or, are LNG projects becoming less attractive as world gas supplies increase???

Industry pushes for LNG tax relief
Boost sought in capital cost

The Canadian oil and gas industry is asking Ottawa for tax changes that could be worth billions of dollars to encourage the development of liquefied natural gas plants in British Columbia.
Giving the industry a tax break would make the LNG export industry more competitive and influence investment decisions, Canadian Association of Petroleum Producers president David Collyer argued in an appearance last fall before the standing committee on finance.
The committee was holding pre-budget consultations in advance of the 2013 federal budget, expected to be delivered next month.
It recommended “that the federal government expeditiously encourage and support the development of infrastructure in relation to liquefied natural gas exports.”
Collyer said the industry wants to see a change in capital cost allowances for liquefied natural gas plants.
Ray Merola profile picture

I suspect this story is part of the near-constant jockeying amongst energy concerns for tax breaks and credits. While I am not versed in Canadian politics, the usual horsetrading involves jobs for tax incentives.

Super major oil companies plan their initiatives and projects years in advance. My inclination is that this "in the press" discussion with the Canadian government has less to do with business plans and more to do with bargaining capital for tax dollars.

We could next delve into a discussion about natural gas extraction; geographic supply/demand; associated transportation economics; the corresponding potential of LNG; and government politics......all great stuff.
Ray the TSR data is for the year 2012, and I made a mistake on shell. It was -0.2, not +0.2.

at 8:30am Feb. 7th RDS.A is trading down $1.27 @ $67.58 on the TSX.
Ray Merola profile picture

Return data reflects the time period. Here's a chart for Shell versus the other super majors over two recent time periods:


I also reviewed 5-year data on Google finance, and Shell appeared to be in the middle of the pack versus the others, sans dividends. However, Shell has an outsize dividend so this should not at least maintained their position.

In addition, investors are encouraged to focus upon forward returns. The past is notable, but continued performance doesn't always pan out.

XOM and CVX have been the recent return winners in the oil patch. European-based companies Shell, BP, and Total have lagged a bit.

For what time frame is your data?
Ray...I thought these total shareholder return numbers were interesting, as they show how poorly shell ranks amongst it peers:

Total 9.2%
ExxonMobil 6.7%
Chevron 6.1 %
BP 3.5 %
Shell 0.2 %
Ray Merola profile picture

I believe the Euro crisis has some share price effect on RDS. The stock is associated with Europe, given their headquarters in the U.K. and Holland. Royal Dutch Shell stocks trades heavily on most European exchanges. However, only about a seventh of Shell's revenues come from Europe. It's an integrated, global enterprise. So while the company is associated with Europe, it's business is not concentrated in the EU.

Nonetheless, if the EU were to "collapse," it would have a significant effect on Shell stock, but I suspect many stocks would have big problems, too. My view is that Europe will solve its problems: slowly, maybe sloppy, but they will get from Point A to Point B.
mike ekim profile picture
What do you think trouble in the euro zone will do to shell price? I mean bond yealds for greece, spain, france going up? In other words talk of euro zone collapse again.
Thanks Ray. I might have missed something.

I used the Q4 presentation cash flow table on the following link (page 12):


I use the same method. Free cash flow: operating cash flow - capex would suggest $46,1bln - $32,6 bln = $13,5bln and dividends to the company holders and non controlling interest totalling $7,68bln. Are the ADR-shares not included in that calculation?
Ray Merola profile picture

You are correct. I carried over the declared dividend / share figure on ADRs on the table. This was incorrect. You used the actual cash figures. An ADR equals two shares, and there is a script program. I believe these two items skewed my per share figures.

In any event, this bolsters the case. The dividend is being paid from FCF. It's covered.

Thank you for pointing this out.
Ray Merola profile picture

Thanks for commenting. I agree that Shell is just fine for the long run.

One note: The company's FCF (Free Cash Flow) has not covered the dividend the last few years. There was a table in the article that outlined this. While there are several ways to calculate FCF, I use operating cash less capital expenditures. M&A activity doesn't count.

By this metric, Shell is borrowing cash to cover capex and the dividend. The RDS balance sheet is strong enough to handle this without problems. Long-term debt to equity is only 16 percent.
Thanks for the insightful article. I too believe that if you invest for the long term, then you should ignore all the quarter-on-quarter "Street games".

The single biggest issue that makes me a bit nervous is the dismal 85% organic RR-ratio. However the 3-year average at 115% forgives some of this.

Meanwhile it's a fine dividend vessel and last year ended with a free cash flow that more than covered it. Will probably continue to pick up some more shares as the market throws possibilities. The cash flow and CAPEX objectives set by the management got a nice start this year. The low gearing will allow flexibility if things go bad, but can only do so much of course. Long term, we need the gas prices to recover as Shell is becoming an increasingly pure play on gas.

Maybe they can take advantage of the US LNG exporting to Asia and Europe. Another interesting possibility is to build more GTL-plants due to the abundance in gas. Pearl GTL is really a pearl in profitability.
Ray Merola profile picture

Today has been a pretty rough day on Wall Street all-around. The stock has rebounded a bit and is down about $1.70 as I write.

I tend to watch for about three sessions after a missed earnings report or otherwise negative news. This allows most of the short-term traders a chance to pile in or out of a security: then try to read the tea leaves if one is so inclined.

In addition, most of the EU markets had a down day, as geo-political concerns took center stage. Since Shell HQs are associated with the U.K. and Holland, there is likely some downdraft there, too.

For those who like the charts, let's see if the stock holds the 50-day moving average. It bounced off that earlier today.

I invest for the longer-term, and rarely let short-term market noise bother me. I thought Shell management was straightforward in their presentation. Personally, I don't believe they were hiding anything.

Did you notice that despite XOM actually reporting lower production figures, the stock didn't get pounded like Shell? RDS had flat YoY production, and suggested a ramp up through 2017, yet the Street didn't seem to care.

The Shell earnings call was quite interesting. One of the more entertaining I've seen this quarter. A recommended review for RDS stockholders. The associated slidepack can be found on the Shell Investor Relations website.
RDS.A is down almost $2.00 on Feb. 4th trading at 3.7 M shares...ouch !
Does wall street know something the CEO is not telling us???
Ray Merola profile picture
Thanks for your comments nScout

I believe all the super major oil companies have political risks. This is just part of their business. Much of the world's best future production will come from unstable or dangerous parts of the world.

Interestingly, an exception is right here in the U.S.; but there is a political reluctance to develop our tremendous, newly-unlocked natural resources, thereby adding an element of risk to the current equation.

Actually, after reviewing the recent prospects of the super majors, Shell is positioned about the same as the others. I believe it's EU-centered headquarters tend to hurt the stock price, despite the fact that only about a seventh of the company's revenues are generated from that area.
nScout profile picture
Interesting article. Stock pricing is relative. Since there are oil & gas firms with better short to medium term prospects than RDS but with fully priced stocks the price of RDS can only come down. Now one can bet on better execution but in addition to the authors' remarks (cf. "Shell Management Has Something to Prove") there are the high political risks faced by the firm.
Ray Merola profile picture
Thanks john001

There's a herd mentality amongst analysts. It's tough for one to separate from the pack; because then they will stand out if the crowd ends up being "right."

Making matters worse is the quarterly EPS mentality and "beating the Street." It's just part of the game.
niuecon profile picture
Exactly, Ray! Being wrong for an analyst doesn't have to be a big deal...if all the other analysts are wrong too. If they're wrong on their own they lose their job and credibility. If they're right on their own, they get big bonuses and prestige.

Needless to say (and yet I'll say it)...I don't usually listen to analysts. I used the temper tantrum to add to my RDS-B position at $72.11.
niuecon profile picture
I"m an idiot!!! Why didn't I just wait another day!? Oh well, guess I'll have buy more:)
Ray Merola profile picture

I suspect your thoughts on buying Shell stock two days ago or today have more to do with the difficulty (if not fallacy) of trying to day-trade / time the short-term market versus your intelligence.

Paraphrasing Ben Graham, "In the short-term, the market acts like a voting machine. In the long-term, it acts like a weighing machine." It's pretty tough to figure out how others may vote on a given day. It's much simpler to weigh an object.

All the best on your 2013 investments. RDS stock should pan out just fine.
Ray...good, well-balanced article. I see the share price has recovered a bit today, in spite of the S&P downgrade to $65 with a sell recommendation. It really bugs me that the market puts so much blind faith in the opinions - for the most part they don't qualify as analyses-of many of today's "analysts".
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