Shell: Are shares worth 30% more?

Royal Dutch Shell's bumper cash flows continue to excite analysts, even if the shares are wrapped up in oil price uncertainty. Graeme Evans reports.

Even though the buy-back taps are now on, fuelled by near-record quarterly operating cash flows of US$14.7 billion, there's no budging shares in high-yielding Royal Dutch Shell at the moment.

Whereas rival BP's Q3 figures got a positive reception on Tuesday, Shell was priced 2% lower today as profits of $5.6 billion came in 2% below consensus.

High-yielding Shell shares are now 11% lower than their 2018 peak in May, driven lower by the increasingly uncertain outlook for oil prices.

The challenge now for Shell will be to convince the City that it can become a world-class investment where shareholders are rewarded even in a lower commodity price environment and across multiple years.

In the most recent quarter, when oil prices were 80 US dollars or more, cash flows of almost $15 billion easily covered its cash dividend, interest payments, share buybacks and helped to further pay down debt.

Going into the fourth quarter, however, the oil price and Shell's shares have both weakened on the back of fears that geopolitical uncertainty will drive down demand at a time of rising supply.

Source: TradingView       Past performance is not a guide to future performance

But having seen Shell produce operating cash flows 37% stronger than his third quarter expectations, Jefferies analyst Jason Gammel is confident the company can still deliver during tougher times. He has a price target of 3,250p, which is a potential upside of nearly 30%.

Gammel said:

"We believe Shell has one of the most sustainable business models in the sector, capable of fully funding the dividend with free cash flow when oil prices are at the bottom of the cycle but also generating strong free cash flow in a moderate oil price environment."

As part of its pledge to purchase $25 billion of its shares by the end of 2020, Shell today said it would commence a second buy-back tranche of $2.5 billion up to the end of January. The first round of $2 billion took place this autumn.

The quarterly dividend was retained at 47 cents a share, with the stock currently offering a yield in the region of 5.6%. The pay-outs are now entirely in cash, with the company no longer offering a share-based alternative.

UBS analyst Jon Rigby also has a "buy" recommendation on Shell, with his price target of 2,950p based on oil at $70 dollars a barrel and an EV to cash flow multiple of 7x.

He said upstream and downstream earnings from Shell were close to consensus in the most recent quarter, but that Integrated Gas - now home to BG Group's LNG and exploration and extraction activities - was short of hopes with earnings of $2.3 billion.

Since 2016, Shell has completed more than $30 billion of divestments in order to reduce borrowings stemming from the BG acquisition. Net debt fell 3% during the quarter to $60.5 billion.