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AJ Bell Youinvest Breaking the Mould – Royal Dutch Shell


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 175% 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 this support 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 Then again, it might not

In December the Monetary Policy Committee voted 7-2 to leave interest rates unchanged at 075% 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 Petra Diamonds on Monday 27th January Virgin Money UK, house builder Crest Nicholson and PZ Cussons on the 28th Wizz Air on the 29th 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 30th January 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 US shale fields in the USA 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 $17 billion and $2

3 billion, joining Chevron, BP, Repsol and Equinor in taking similar hits 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 numbers 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 $214 billion a year ago Note that for 2020, analysts are expecting a recovery to $205 billion, helped by the assumption a modest increase in Brent crude to $71 on average and broadly flat gas prices of $275 for one million British Thermal Units

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 $188 a year and no change is expected there The actual cash payout comes to around $15 billion or £115 billion by the way and implies a dividend yield of around 65%

Comments on buybacks will also be noted They totalled $73 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 that is a decision only you can take Thank you for watching and I look forward to seeing you next time

Source: Youtube

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