Royal Dutch Shell (LSE:RDSB) released its second-quarter results this week, and it suffered losses in several areas. The RDSB share price has been falling in recent weeks, and these latest results have not helped. While it is still up from its March low of around £9 a share, the RDSB share price has dropped more than half its value since January.
These second-quarter results may make depressing reading, but surprisingly they are slightly better than analysts were expecting. This offers a beacon of hope in a murky sea of financial bad news.
Times are hard for oil companies, and the majors are not exempt from the downturn. The price of oil persists in the $40 range with little sign of rapid recovery until the pandemic is brought under control. As Covid-19 still rages on, the light at the end of the tunnel seems a distant flicker. With expectations of a subdued oil price for some time to come, Shell adjusted the value of its assets, which resulted in a $16.8bn pre-tax impairment charge for the quarter.
All is not lost
One advantage oil giants like Shell have over smaller independent oil companies like Premier Oil, is that they have an in-house trading division. This is like their own day-trading department that allows them to make big profits in oil price volatility. This has paid off in recent months and helped generate $2.4bn in underlying profit for its oil products division. An impressive sum, 89% higher than the equivalent period in 2019. Its underlying chemicals profits also rose through the period, up 56% to $206m.
CEO Ben van Beurden said: “Our decisive cash preservation measures will underpin the strengthening of our balance sheet. Our high-quality integrated portfolio, disciplined execution and forward-looking strategy enable sustained competitive free cash flow generation.”
Despite finding itself amid a global crisis, Shell’s management’s focus is on working to ensure it emerges stronger and fitter. It took decisive action as the coronavirus impact took hold, rebasing its dividend for the first time in over 70 years and postponing the next tranche of its share buyback programme. It also sped up digitalisation initiatives that should reap benefits and cash savings in the future. All of this has prevented the RDSB share price from crashing outright.
A wobble in the RDSB share price
Uncertainty regarding oil demand for the next couple of years, along with geopolitical struggles and global financial woes, are all factors contributing to the wobbling RDSB share price. It is no surprise there is nervousness in the financial markets and many companies are seeing their share prices suffer.
In the very long term, I think Shell, along with its FTSE 100 peer BP, will reinstate themselves as big players in energy, both in fossil fuel and renewables. This is not likely to be a quick recovery, but I think success will eventually prevail. Although RDSB cut its dividend in the spring, it looks safe at this level and still offers a yield of around 4%. In the current economic circumstances, this is not a bad return for an income investor’s portfolio. Overall, I think RDSB shares remain a good buy at current prices.