Shares in Royal Dutch Shell took a hit this morning as the oil major issued its first profit warning in ten years.
As the company's new chief executive, Ben van Beurden, put it: "our 2013 performance was not what I expect from Shell".
Adjusted earnings (which exclude one-off items and changes in the value of oil inventories) fell to around $2.9bn in the fourth quarter of 2013. That's down from $5.6bn the year before, and well below analysts' expectations of $4.9bn.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So what's the problem? Should you sell? Or is this a minor buying opportunity?
Shell seems to have taken hits in most parts of its operations. As far as the business of finding and producing oil goes (its upstream' operations), exploration expenses were up, production volumes were down, and oil prices were broadly flat which all adds up to lower profits.
Meanwhile, production of high-value oil and gas including gas-to-liquid operations and liquefied natural gas was hit hard by maintenance activity in the last three months of 2013. Exploration and production in the Americas remains loss-making. And in Nigeria, where output has suffered because of oil thefts, security conditions "remained challenging".
The downstream operations such as refining (turning oil into other goods) and distribution (for example, petrol stations) didn't have a good quarter either. The company suffered from "significantly weaker industry refining conditions", especially in Asia and Europe, where there's lots of over-capacity.
In fact, conditions are so bad, say company executives quoted by the FT, that Shell loses $10 for every barrel it refines in Singapore.
Don't panic this looks like kitchen sinking'
However, it's recovered a bit since (trading down 2% early in the afternoon). And that makes sense: long-term investors should hold their nerve and hang on to their Shell shares or even buy some if you haven't already.
Why? Well, the company seems determined to keep shareholders happy: in the third quarter, it raised its dividend by two cents to $0.45 a share. It will announce interim dividends for the fourth quarter on 30 January. That's one to watch to see whether it will cut the dividend in light of the profit warning.
But that seems both unlikely and unnecessary dividend cover on pre-warning earnings was a reasonably healthy 2.1 times. That puts it on a dividend yield of more than 5%, a good deal more than the average FTSE 100 stock.
Moreover, the dividend is paid in dollars. The greenback has been strengthening as the Fed has slowed down its money-printing obviously, currencies can move down as well as up, but the US dollar seems a good one to have exposure to right now.
In any case, the profit warning might ultimately prove a good thing the new boss getting all the bad stuff out of the way before he turns the company around. As Malcolm Graham-Wood, oil specialist and founding partner at Hydrocarbon Capital said on his blog (www.malcysblog.com), this looks like a case of an incoming chief executive deciding "to clear the decks and leave himself a decent starting point to what might be ten years in the job".
My colleague Phil Oakley wrote in more depth about Royal Dutch Shell in a recent issue of MoneyWeek magazine and he hasn't changed his mind on the stock. If you're not already a subscriber, you can subscribe to MoneyWeek magazine.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Should you be worried about energy windfall tax proposals?Analysis Calls have been growing for a windfall tax on UK oil and gas producers. It's a popular idea, but is it a good one? And what does it mean for investors in the UK's energy companies? Rupert Hargreaves explains.
-
The outlook for Shell shares is mixed, despite bumper profitsAnalysis With profits surging, it looks as if Shell is on a roll, but the company’s growth from here is hard to see as Rupert Hargreaves explains.
-
Investors can no longer be sure of ShellNews Oil giant Royal Dutch Shell, one of the market’s most reliable income providers, has cut its dividend for the first time in over 70 years. Matthew Partridge reports.
-
The Shell BG deal will be the first of many – which oil giant is next?Features Shell's takeover of BG Group will spark a wave of mergers in the energy sector. John Stepek asks – who will be next?
-
Company in the news: Royal Dutch ShellFeatures A shock profit warning from Royal Dutch Shell has taken the City by surprise. Phil Oakley explains what that means for investors.
-
Three stocks to buy with future income in mind
Opinion Professional investor Ben Ritchie picks three robust stocks that should generate a sustainable and growing dividend for future income.
-
Shares in focus: Can Shell deliver the goods?Features Oil giant Shell is out of favour with the City, but does its dividend yield make the shares worth buying? Phil Oakley investigates.
