ii view: Shell confirms big hit from Texas winter storms

Shares for this oil major fell over 40% in 2020 but are up by more than 5% in 2021. Buy, sell or hold?

First-quarter guidance and update

ii round-up:

Oil giant Royal Dutch Shell (LSE:RDSB) today flagged a hit of up to $200 million on its adjusted first-quarter earnings given the impact of extreme winter weather conditions on its US Texas operations. 

Sales volumes under the ongoing pandemic are expected to be between 3.7 and 4.7 million barrels per day, less than the 4.78 billion sold during the prior fourth quarter.

Shell shares rose by more than 1% during UK trading, leaving them up by over 40% since late October and just prior to the announcement of vaccine development success. Shares for rival BP (LSE:BP.) are up by more than 50% over the same time. 

Adjusted earnings for Shell’s upstream exploration business are expected to prove positive during the quarter given the recent upturn in energy commodity prices. The oil price is up by around a fifth year-to-date. 

Trading and optimisation results for its integrated gas division are expected to be significantly below average. Total production of between 920 and 960 thousand barrels of oil equivalent per day compares to the 942 thousand barrels achieved in the fourth quarter. 

Shell reported a loss of $21.7 billion for the full-year 2020, hit by a supply dispute between Saudi Arabia and Russia and significantly reduced energy demand under pandemic lockdowns.

In the autumn, management announced up to 9,000 job losses as it looked to transform towards becoming a low-carbon energy producer. A move accelerated by the global pandemic. Earlier in 2020 it also cut the dividend for the first time in decades.

First quarter 2021 results are scheduled for the 29 April. 

ii view:

Profit margins are lower in the power and renewable energy sectors, areas Shell is now looking to focus on as it pushes towards low-carbon fuels. As such, reducing organisational complexity and providing a more efficient and lower cost base is now vital as its looks to compete with both existing players such as SSE (LSE:SSE) and other oil majors like BP moving in a similar direction. Previous business disposals have inevitably had an impact on production numbers and therefore income. Today’s latest update is also a reminder that the weather can also play its part. 

For investors, debt of over $70 billion as of its last full-year results underlines the need for more cost cuts and potential further disposals to help balance the books. Previous write-downs in business asset values and the 2020 cut to the dividend payment were also not good news, if arguably required for Shell to reset its strategy. 

But formed in 1907, Shell’s long track record of dealing with volatile energy demand and prices is not to be ignored. And, despite its first dividend cut since the Second World War, an estimated dividend yield of over 3.5% is still attractive in today’s ultra-low interest rate environment. In all, and with analysts currently estimating a fair value share price of around £17.44, Shell’s position as a core portfolio constituent still looks deserved.   

Positives: 

• Rebased but sustainable dividend payment
• Previous purchase of BG Group improved both its product diversity & climate change credentials

Negatives:

• The weather can raise operational challenges
• Competition in its new focused arena is increasing

The average rating of stock market analysts:

Strong buy