Royal Dutch Shell half-year results

Royal Dutch Shell a global group of energy and petrochemical companies. I have a holding in my income portfolio (epic code: RDSB)

Shell announced their 2nd quarter and half year results today.  Second quarter 2013 sales were $112.7bn down 3.8% and earnings, on a CCS basis, were $2.4bn compared with $6.0bn in the same quarter a year ago. Earnings included a net charge of $2.2bn after tax, mainly reflecting impairments to shale assets in North America and impairment of Italian downstream assets.  A dividend of $0.45 has been declared for the second quarter, up 4.7% on last year and totalling $0.90 for the half-year. 

For the six months in total sales were $225.5bn down 4.9% on last year, earnings on a CCS basis were $10.3bn, down 24.3% and diluted EPS of $1.57 was down 23.8%. 

Production in the second quarter was down 14% from the first quarter and showed a 1% decline for the six months compared to last year, with gas production up 3%, but oil down by 5%.  CEO Voser's comments "...We are not targeting oil and gas production volumes; rather we are focusing on       
financial performance..." rang hollow, but may indicate further decreases over the coming months, certainly likely as they have indicated asset disposals in North America and onshore Nigeria in the future.                               

Net debt was $20.4bn an increase of $1.2bn from the year end, as free cash flow at $6.9bn for the six months was $5.7bn below last year.  Gearing (debt to equity, not the debt to equity plus debt, that Shell use) was 11.6% compared to 11% at the year-end, in most companies this would indicate inefficient financing of the balance sheet, but for Shell with their political, environmental and operational risks in addition to their substantial capital expenditure requirements it is probably prudent.

In the next 18 months Shell expect to see five major project start-ups, which should add over $4bn to their 2015 cash flow.  Ordinarily such a substantial increase in cash flow would lead to higher returns to shareholders in the form of increased dividend payments, unfortunately this may not materialise as they state that "...Shell is rich with new investment opportunities and is capital constrained...".  So I am not expecting dividend increases to exceed 5% over the coming years.

So why continue to hold Shell?  For the reason that it is a high yielding stock (5%+) and, with the exceptions of 2010 and 2011 when the dividend payment was not increased, tends to match or exceed inflation.  Over the past 5 years the dividend payment has grown by a compound annual growth rate of 3.6% pa, compared to an average inflation rate over that period of 3.2% pa.  I am comfortable with a weighting of just under 4% of my income portfolio and even with the decline in the share price today, my internal rate of return (dividends not reinvested) over the 3 years of my holding is 14% pa.

Exxon also announced their results today and have seen their net income fall 57% on weaker refining and lower production.  Although excluding the sale of their Japanese lubricants business from last year's numbers, earnings fell 19%.