Name: AJ Bell Youinvest Breaking the Mould - Royal Dutch Shell
Uploaded: 2020-03-11T21:10:15.000Z
Duration: 7 min 27 s
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After Davos and interest rate decisions in Japan and Europe, the big macroeconomic items

of the week will be the monetary latest policy announcements from the US Federal Reserve

on Wednesday 29th January and then the Bank of England on the 30th.

With regard to the US central bank, the CME Fedwatch survey currently puts an 84% chance

on no change in policy at this meeting, which would leave the upper band of the target range

at 1.75%. However, the same survey puts a 54% chance of at least one cut (and just a

6% chance on at least one increase) by year end.

As such the outlook statement may be telling, especially as the Fed’s apparent plan is

to leave rates unchanged all year at 1.75%.

Also watch for comments on the central bank’s intervention in the overnight bank funding

(repo) market since the autumn. Fed Governor Jay Powell continues to swear blind that this

is “Not QE4” but whether it is Quantitative Easing or not, three things are clear

One, the Fed’s balance sheet is swelling again

Two, the intervention looks set to run for longer than expected

Three, financial markets seem to be feasting on this cheap cash, as share prices have really

motored since the Fed began to pour fresh liquidity into the system last autumn.

This does however beg the question of what may happen when the Fed starts to withdraw

Back here in the UK, the chances of a rate cut seem to be rising after recent weak GDP,

PMI and retail sales readings, though you could argue that all of these were still affected

by the former Brexit deadline of 31 October and the General Election of 12 December. With

the Budget due in mid-March, the Bank of England might decide to wait and see if there really

is a bounce post-Brexit and how much extra money the Government is going to spend.

In December the Monetary Policy Committee voted 7-2 to leave interest rates unchanged

at 0.75% and 9-0 to leave Quantitative Easing at £435 billion but a third member of the

Monetary Policy Committee, Mr Vlieghe, now seems to be leaning toward joining Jonathan

Haskel and Michael Saunders in calling for a cut.

The Bank of England is still running its QE scheme, which topped out at £435 billion.

It has stopped adding to this but it is not exactly dashing to withdraw or sterilise it

either, and the market does not expect any change at this meeting.

On the corporate front, we have a growing number of results releases and trading statements

from FTSE 100 and FTSE 250 and small cap firms due in the coming week. They include

Virgin Money UK, house builder Crest Nicholson and PZ Cussons on the 28th

BT, Evraz, St James’s Place, Unilever, TalkTalk and Diageo on the 30th

And finally SSE and Shaftesbury on Friday 31st January

But for all of those the name perhaps the stock most capable of causing a fuss in the

week ahead is oil major Royal Dutch Shell, which is due to its full-year results on Thursday

As we can see here shares in Shell are down a little bit over the last 12 months, lagging

the FTSE 100 and also the oil price, which is up by around 7% in dollar terms.

This modest showing comes despite a pledge from chief executive Ben van Beurden to return

$125 billion of cash to investors via dividends and share buybacks. That compares to a market

cap of £177 billion or $231 billion – so more than half, in dollar terms.

However, three issues are hurting Shell’s shares

First oil may have rallied late in the year but only because OPEC oversaw another cut

to output. Overall, the market feels well supplied right now

Second, natural gas price prices continue to sag, thanks to rampant output growth from

Third, the pushback against fossil fuels and hydrocarbons is gathering pace. This may mean

fund managers and investors running Ethical, Social and Governance (or ESG) screens start

to avoid or sell shares in firms such as Shell.

This combination forced Shell to cough up a profit warning in late December. The company

lower its oils products sales forecast and also said it would write down the value of

certain assets by between $1.7 billion and $2.3 billion, joining Chevron, BP, Repsol

Besides the degree and location of those write-downs, which will hit the stated figures, investors

and analysts will dig into three main sets of figures when they look at the full-year

The first is the mix of earnings. Gas, upstream (which is oil exploration and production)

and downstream (which is refining and petrol stations) are all expected by analysts to

show a drop in profits on a year-on-year basis. That divisional mix means that full-year current

cost accounting earnings, which adjust for movements in the value of inventory, will

reach $18.1 billion, down from $21.4 billion a year ago. Note that for 2020, analysts are

expecting a recovery to $20.5 billion, helped by the assumption a modest increase in Brent

crude to $71 on average and broadly flat gas prices of $2.75 for one million British Thermal

The second is cash flow. Shell got through the oil price’s collapse down to around

$30 in 2015-16 by cutting investment, selling assets and raising debt. None of those three

are a sustainable way of paying a dividend and the good news is that free cash flow more

than covered the dividend in 2017 and 2018.

The second is cash returns. Shell pays a dividend of $0.47 a quarter or $1.88 a year and no

change is expected there. The actual cash payout comes to around $15 billion or £11.5

billion by the way and implies a dividend yield of around 6.5%. Comments on buybacks

will also be noted. They totalled $7.3 billion in the first nine months of 2019.

After the hard numbers, analysts will look to the ESG issue and Shell’s strategic progress

in the field of renewables. Do note that Shell already owns

substantial amounts of solar power capacity a stake in solar panel manufacturer SunPower

NewMotion, an operator of more than 40,000 home-based charge points for electric vehicles

across the UK, France, Germany and the Netherlands And battery expert Saft

Moreover, Shell has committed 10% of its research budget to renewable energy and around a quarter

of development spending on low-carbon initiatives.

Aha, some of you will counter – that still some 90% of R&D is still focused on non-renewables

and you may not feel Shell is doing enough to meet your own, personal ESG criteria – but

Thank you for watching and I look forward to seeing you next time.