Shell no longer a 'buy' due to challenging outlook, says Charles Stanley

Charles Stanley has cut its recommendation for Royal Dutch Shell from ‘buy’ to ‘accumulate’, saying it sees less upside after fourth-quarter profits came in well below forecasts.

Shell announced that it would be curtailing $15bn of potential spending over the next three years in light of the recent drop in oil prices, as it reported adjusted earnings of $3.3bn for the final quarter of 2014, well below the consensus forecast of $4.2bn.

While the results were a 12% improvement on the $2.9bn registered in the fourth quarter of 2013, Charles Stanley noted that the previous year’s figures were depressed by high exploration write-offs and a negative hit from maintenance on some of its high-margin activities.

“A better comparative would be Q3 earnings of $5.8bn (achieved at an oil price of $100/barrel),” said analyst Tony Shepard.

One positive feature of the results was the strength of Shell’s balance sheet, according to Shepard, with gearing having fallen to 12% from 16% the year before.

Shepard said: “The strong balance sheet will take the strain as Shell begins to reduce capital expenditure and operational expenditure in order to cut its cash flow break-even oil price.

“Shell starts from a strong position with gearing of 12% but the outlook has become challenging and the share price may struggle to outperform. We move the recommendation to ‘accumulate’.”

The analyst said that oil prices will remain low for most of 2015, giving an average price of $50 a barrel, before improving to $60 in 2016.

On these estimates, the stock is trading at price-to-earnings multiples of 23 and 17 on 2015 and 2016 forecasts respectively.

“These high ratings may not be a problem if you view the low oil price fall as temporary. More important is the dividend yield which is 5.6% and almost looks bullet proof.”

The stock had slumped 4.2% to 2,063.5p by 11:12.