Royal Dutch Shell PLC (RDS) is an Anglo-Dutch multinational integrated oil and gas company which explores and extracts crude oil and natural gas around the globe. RDS, headquartered in the Netherlands, was recently named the 5th largest corporation in the world in terms of revenue in the 2016 Fortune Global 500 list. The company sells a number of different products, including gasoline, diesel, aviation fuel, marine fuel, lubricants, bitumen and sulphur in around 70 countries.
RDS was added to our larger discretionary portfolios around March this year after a significant decline in the oil price presented us with an opportunity to buy in at reduced prices. We chose to increase our exposure to this area as we viewed the reduction in oil prices differently to those which have occured in the past two decades. Instead of being driven by weakening demand, this reduction has been driven by over supply within the market, and for this reason we see a recovery in the oil price on the horizon when production levels are reduced. In reaction to the fall in the oil price, on 29th September the industry regulator OPEC announced plans to limit crude oil output for the first time since 2008. We are still waiting for these plans to be finalised in November’s OPEC meeting, however this suggests to us that the regulator is supportive of a recovery in oil prices which could work in RDS’s favour.
In terms of stock price performance, RDS is up 45.58% since the start of the year (as of 19th Oct). Despite this success, quarter 2 results were poorer than expected due to a number of reasons, with the acquisition of BG Group playing a large role in earnings reduction and the increase in company debt compared with Q2 last year. The reduction in earnings also came as a result of a decline in oil and gas prices, weaker refining industry conditions and increased taxation. As a result of the acquisition, BG assets added to production levels throughout the period and are expected to add to cash flow in the Q3 results which will be released on the 1st November.
Going forward, the outlook in the oil industry looks somewhat more positive than in previous months, however it has been highlighted that oil companies must normalise to a low oil price environment in order to remain competitive in the long term. This is achieved by cutting costs and strengthening the firm’s balance sheet. Looking at RDS, the company fundamentals look positive, however the company’s debt situation will continue to be monitored by our investment professionals. The company has been working on consolidating its assets and has been in the process of an asset sale programme to reduce debt.
RDS is our favoured blue chip pick for the last quarter, having performed well within the period and since its inclusion in portfolios in March. Based on macroeconomic factors along with the company management, strategy, and financial situation, we still feel positive about the holding in the long term and eagerly await the Q3 results.
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Nothing contained on this website constitutes investment, legal, tax or other advice and is not to be relied upon in making an investment or other decision. The information in this document was correct as of 20/10/2016.