Shell retains support despite big loss

After so much bad news, what now for Royal Dutch Shell? Our head of markets examines today's results.

After an unsurprisingly difficult second quarter, Royal Dutch Shell (LSE:RDSB) is pulling all the financial levers in its power to mitigate the economic impacts.

Of course, central to the challenge is the oil price itself, which remains down 35% in the year to date. For the second quarter in particular, there was virtual demand destruction as planes stood idle, manufacturing all but ceased and travel in general slowed to a trickle.

The double whammy was completed with oversupply to the extent that even physical storage became an issue. There is also some strong debate as to the future of oil, as the pandemic seems to have focused the collective mind on renewable energy and resources.

As such, and as the company had previously guided, Shell has taken an impairment charge of $16.8 billion, reflecting a revised medium and long-term outlook on the price and refining margin outlook.

While the figure may be towards the lower end of the previous provided range of $15 to $22 billion, it nonetheless puts further pressure on the balance sheet, which is now shouldering a gearing figure of 32.7%, up from a previous 27.6% and well in excess of the long-term target of 25%.

At the same time, part of the financial reengineering has been in the form of the sale of assets. Along with restrictions imposed by the pandemic as well as OPEC itself, this has resulted in a drop in production for the quarter of 6%.

Previously announced job cuts have resulted in the numbers being littered with substantial monies being put aside for restructuring and redundancy costs, and overall the fact that there is a quarterly adjusted profit at all has been a pleasant surprise to some investors.

The company has also posted adjusted earnings for the half-year of $3.5 billion, although this is down 60% on a comparative basis.

Rather more positively, Shell has been moving rapidly to improve those aspects under its control. The previously announced asset disposals, reduced operational and capital expenditure and the reduction of the dividend should all contribute to the availability of an additional $30 billion.

Indeed, underlying operational expenditure is down 12% in the period and the capital expenditure number is relatively under control.

Meanwhile, the company’s prodigious cash generative ability has underpinned the overall financial position and even on a reduced basis, the dividend it is able to pay amounts to a yield of around 3.5%, which is an increasingly rare prospect for income-seeking investors.

The relatively muted reaction to the update stems partly from the fact that Shell had trailed some of the less palatable numbers, such as the impairment charge. In addition, much of the sting had already been taken out of Shell’s current prospects in terms of the share price, where a 55% drop over the last year compares to a decline of 20% for the wider FTSE 100.

Despite the doubts over the direction of the company over the very long term, for the moment the company remains extremely cash generative which, combined with any number of diehard supporters, means that the market consensus of the shares as a buy is likely to remain intact.