Shell: A lost cause?

Background

Shell Refining Co. (FOM) Bhd is principally engaged in the oil and gas industry namely refining and manufacturing of petroleum products in Malaysia. Its operations also include commercial gas to liquids plant of its kind in Bintulu, Sarawak, and an oil refinery in Port Dickson, Negeri Sembilan.

Its Upstream operations focus on the development and extraction of crude oil and natural gas offshore Sarawak and Sabah. In Downstream, Shell’s main activity is in refining, supply, trading and shipping of crude oil and petroleum products through the sales and marketing of transportation fuels, lubricants, specialty products and technical services. Its Projects and Technology business provides technical services, technology capability and major project delivery in both Upstream and Downstream activities.

Latest Financial Results

For QE31/12/2014, Shell posted 15% lower revenue of RM2.9 billion due to decreasing product prices since early July. The Company posted an after-tax loss of RM917 million this quarter, contributed by stockholding losses of RM445.8 million & impairment loss of RM461 million & operating loss of RM10 million.

The extremely huge loss - especially the recognition of the impairment loss at this juncture - is probably a kitchen-sinking exercise that marked the end of a bad phase. Whether it will herald the start of a more exciting & profitable phase for the company is yet to be seen.


Table 1: Shell's last 8 quarterly results

Past Financial Performance

For the past 17 years, Shell has reported substantially profit as well as huge losses. If we add up the results for the past 17 years, its revenue amount to RM152 billion while its net profit amounted to RM1.11 billion.


Chart 1: Shell's last 17-year results

Over the past 17 years, the average EPS is about 21.76 sen per annum. At the same time, it paid out total dividend of RM5.71 per share or an average DPS of 33 sen per annum. Its NTA rose from a low of RM2.23 as at 31/12/1998 to a high of RM8.11 as at 31/12/2007. From there, it slowly dropped back. After the huge loss in FY2014, its NTA stood at only RM1.08 per share.

 
Diagram: Shell's EPS, DPS & NTA for the past 17 years

Valuation

Shell (closed at RM5.26 yesterday) is now trading at a PB of 4.9 times. No PER is computed as the company is a loss-making concern. Since no dividend has been paid out in the past 3 years, no DY is computed. With the high PB, there is little justification in buying this stock.

Technical Outlook

Looking at the lows recorded in 1998-2003, Shell may have more downside ahead. The strong support is at RM3.50-4.00. Technical indicators (MACD & Stochastics) have yet to flag a bottom. It is interesting to note that the share price was holding quite well despite the huge loss reported last week. This may be interpreted as a positive sign that selling pressure has exhausted. If so, the share price could well hold at the present level at RM5.00.


Chart 2: Shell's monthly chart as at Feb 23, 2015 (Source: ShareInvestor.com)

Conclusion

Based on the above, it is hard to make a case to get into Shell despite its brand name. However, price recovery can only begin with good financial performance. For contrarian investors, Shell could be worth slowly accumulation at RM3.50-4.00.

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.