Tuesday, May 19, 2015

Shell: Green Shots of Recovery?

Background

Shell Refining Co. (F.O.M.) Berhad (“Shell”) is involved in the refining and manufacturing of petroleum products in Malaysia. Its 125,000 barrels/day refinery is located in Port Dickson. Due to low margin, the company is examining long-term options, which may include the potential sale of the refinery or its conversion to a storage terminal. For more, go here.

Latest Quarterly Results

For QE31/3/2015, Shel reported a net profit of RM84 million on a revenue of RM2.48 billion. Bottom-line recovered from a net loss of RM916 million recorded in the immediate preceding quarter, QE31/12/2014 or a net loss of RM44 million recorded in the same quarter last year, QE31/3/2014. Improved bottom-line is contributed by improved refining margins and losses in Q4 2014 due to stockholding losses of RM445.8 million and impairment losses of RM 461 million. Revenue dropped q-o-q by 15% to RM2.5 billion due to decreasing product prices.


Table: Shell's last 8 quarterly results


Chart 1: Shell's last 35 quarterly result

Financial Position

As at 31/3/2015, Shell's financial position is deemed challenging, with current ratio at 1.03 times & gearing ratio at 6.31 times. If not for the confidence in its major shareholder, Shell Overseas Holdings Ltd (a part of the Royal Dutch Shell plc, ahich is in turn one of the six Oil & Gas supermajors as well as the 4th largest company in the world in 2014 in term of revenue).

Valuation

Shell (closed at RM4.90 yesterday) is now trading at 3.6 times its book value (based on NTA of RM1.36 as at 31/3/2015). We can't compute its PE multiple as the company made a loss of RM3.53 per share in the last quarters. In addition, Shell has ceased paying dividend since FY2013. Thus, Shell's valuation is deemed demanding based on these models (PBR, PER & DY). The only justification to get into this stock is that its earning could be reaching its trough. As the saying goes, what goes up must coming down. Conversely, what goes down must come up.

Technical Outlook

Shell has been in a steady & sharp decline for the past 4 years.

 
Chart 2: Shell's monthly chart as at May 18, 2015 (Source: ShareInvestor,com)

If we put Shell's monthly chart next to its earning chart for the past 10 years, we can see that the price  movement tracks the earning trend fairly well. To gauge when to buy, we need to know when the earning has bottomed. The over-sized loss in QE31/12/2014 & the small profit in QE31/3/2015 could mark the bottom & recovery in the earning.


Chart 3: Shell's monthly price chart & earning chart from FY2005 until today  

Conclusion

Based on improved financial performance, Shell could be a good stock for long-term investment. However, any entry should be carried out very slowly as the earning recovery is still very tentative.

 Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Shell.

No comments: