Equity prospects

Royal Dutch Shell

John Royden, Head of Research

Price£21.53

52 week high-low£23.9 - £18.70

Net yield6.71%

Hist / pros per28.6 - 16.2

Equity market cap£177,466

Royal Dutch Shell (Shell) took on more leverage when it bought BG back in early 2016. The aspiration was that the deal was being done at the bottom of the oil price cycle and that an oil price recovery, plus asset sales, would enable Shell to move its balance sheet back to a stable gearing or debt to equity ratio of 20%. 

The balance sheet at the July First Half Results sat with a gearing of 25%, down from 28%.
 
The WTI oil price has recovered since the February 2016 low of $29 and is now trading at $49 which is close to the post-dividend cashflow breakeven, estimated at $50 per barrel. We see supply / demand / inventory dynamics as well as firmer fourth quarter global growth, taking the oil price higher in the near future.
 
Shell’s share price is highly correlated to the oil price but if Shell manages to lower the breakeven to $40 by 2020 in addition to enjoying higher oil and gas revenues then the 6.5% dividend yield that you now get would start to look like an, ex post, wise holding for income portfolios. 

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