Royal Dutch Shell (LSE: RDSB) shares fell around 30% in the past year. Energy stocks had a tough year on worries of slowing growth due to Covid-19. I would like to analyse the company to understand the company’s long-term prospects.
Royal Dutch Shell fundamentals
Shell is one of the leading multinational oil and gas companies. It ranks in the top 10 companies in the world in terms of revenue. The company’s revenue for the full-year 2020 fell by 48% year-over-year to $183.2bn. The huge drop in revenue was primarily due to the negative impact of Covid-19. The adjusted earnings also dropped to $5bn in 2020 from $16bn in the year 2019.
The company had a positive operating cash flow in 2020. Cash flow from operations was $34bn in 2020. The company exceeded its cost reduction targets set in March 2020. Cash capital expenditure was reduced to $18bn from $24bn in 2019, which was better than the $20bn or lower target set by management. Underlying operating expenses were $33bn in 2020, lower than $37bn for 2019.
The board expects that the first quarter 2021 interim dividend to be $0.1735 per share, which is an increase of 4% over the dividend for the fourth quarter of 2020. Earlier in April 2020, it had cut its dividend to preserve cash due to the fall in profits after the starting of the pandemic.Â
The company’s balance sheet is improving. Net debt was reduced from $79.1bn in 2019 to $75.4bn in 2020. This was mainly due to the improvement in cash balance.
Royal Dutch Shell is also set to have net-zero emissions by the year 2050. According to my view, this is a good strategy since the company is planning well in advance for relying less on the income from oil. It is also looking to increase adjusted earnings to around $6bn by 2025. It is also aiming to increase to 40 million customers at 55,000 retail sites from the current 30 million customers at 46,000 sites today, and growth of its global electric vehicle (EV) network from more than 60,000 charge points today to around 500,000 by 2025.
Risks to consider in Royal Dutch Shell shares
The UK government is planning to ban the sale of new combustion-engine vehicles from the year 2030. This could put a risk to the company’s long-term plans to increase retail service stations. The move to electric vehicles might also reduce the overall demand for oil. The company also announced recently that its oil production has peaked and is likely to decline going forward.Â
Global growth is severely affected by Covid-19. If oil prices fall this year, the company’s profits might fall again. Another concern is that the company might also continue paying the reduced dividends for a longer term. Even though net debt was reduced, the debt-to-equity ratio increased to 0.68 compared to 0.51 for the year 2019.Â
While the fundamentals are improving for this large-cap FTSE 100-listed company. I feel that the current price might not offer much upside considering the risks. I would not buy Royal Dutch Shell shares today.