RDS plc, commonly referred as Shell, is a well known multinational oil corporation of British and Dutch beginning. Globally, it is 2nd largest privately owned energy firm, and one of the principal energy superiors (vertically amalgamated private segment oil exploration, natural gas, and oil product marketing firms). The corporation has its principal offices in The Hague, Netherlands, with its official offices in Shell Centre, London.
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Royal Dutch Shell core business involves exploration, production, processing, transporting and marketing of oil and gas products. Also the firm has considerable petrochemicals investments (Shell Chemicals), as well as nascent renewable energy sector developing wind, solar and hydrogen energy opportunities.
RDS plc is incorporated in Britain with its commercial headquarters in The Hague (Bahgat 2003; Mishkin 1998). Also its tax residence is based in Netherlands, while its primary listings are on both London Stock Exchange as well as Euronext Amsterdam (only “A” stock shares are recognized as part of AEX index).
On global perspective, Shell runs its businesses in over 140 countries. While Shell Oil Company based in Houston, Texas, is one of the group’s principal division. RDS principal business is basically the management of vertically incorporated oil corporation.
The establishment of technical, financial and commercial expertise in all the spheres of this core vertical integration from the scope of exploration, production, transportation, refining in addition to marketing, forms the principal capabilities on which the group was founded.
The company has applied these aspects to its production and marketing segment and this contributed to its stable and proportional profit margins (Peters 2000).
Also the vertical business blueprint has given the company considerable economies allowing establishing explicit barriers to entry both geographically and on worldwide levels in specific areas of the energy market. However, the company noted vertical integration was diminishing in value despites the profound structures (Miller 2007).
Delivering value shareholders
Royal Dutch Shell plc has been described as a unique due to its organizational structure. This has made to be one of the most prominent organizations in the world such as the Roman Catholic and the UN. However, the group’s organizational structure is more complex than either of the two mentioned organizations.
From its inception the group has over the years strived to provide the best services to its clients as well as its shareholders (Wang 2005). Considering that the group is an incorporation of Royal Dutch and Shell, the group has formulated an approach that is unique in structure and execution. The said approach is referred as governance responsibilities.
From management perspective this approach has helped in the manner Royal Dutch Shell handles are issues regarding shareholder satisfaction. Though, the groups approach to diverse attributes regarding shareholders do not correlate to the ordinary managerial scope, it has over the years proved to be one of the most rewarding organizations despite its controversial undertakings around the world.
Royal Dutch Shell plc, common business principles determines how this group conducts its external and internal affairs. The objectives of the group are to efficiently and effectively engage, responsibly and profitably in gas, chemicals, oil and other preferred investments. This includes exploring and developing other dynamic sources of energy so as to meet the mounting requirements of energy in the world.
Equally, the group maintains a high standard of performance as well as a profound long-term position in the business environment. Also the corporation works closely with its clients, partners and policy-makers so as to advance more reliable and sustainable use of energy and other natural resources.
In order to deliver value to its shareholders RDS plc has established set of principal values-openness, veracity and respect for people. Also the group strongly believes in the fundamental essence of trust, honesty, teamwork as well as professionalism, including pride in what they do. These objectives are reflected in the group’s business principles.
And as part of its obligation to quality delivery they have initiated acts of balancing short as well as long term interests, incorporating monetary, environmental and civic considerations into group’s decision-making.
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These parameters have been reflected in the manner the group has succeeded in delivering value to its shareholders for the last five years (Pilbeam 2005). According to the market analysts, the company managed to deliver an average TR (TOTAL RETURN) of 2.55 to its shareholders (See Table 1).
Delivering value to shareholders plays a critical role to each and every commercial organization. Perhaps it is from such understanding that Royal Dutch Shell opted to diversify and provide its shares into two distinct classes-A and B (RDS-A and RDS-B). From 2005-to-2010 RDS-B was better placed in regard to use investors and shareholders (Emilio 2009).
The scope of this was that the shareholders enjoyed 15% tax exemption in that they were not Danish citizens. Also to sustain the value allied to service delivery, every RDS American Depository Receipt was valued at two shares traded either at Amsterdam or London. Also, the group managed to deliver a 0.55% average yearly increase in its EPS commencing from 2005.
The mounting increase in crude oil as well as gas prices played a role in boosting the group’s earnings. However, the swift fall in energy prices in 2008 and 2009 including to feeble global demand saw a 26 % decrease in anticipated earnings per share in early 2009 to $ 3.09 (Haley 2006). While for 2010 fiscal year analysts had anticipated the earnings to mount by almost41% to $5.77/share.
Equally the company was expecting EPS to reach 25%. The scope of this observation was trained at providing the shareholders with satisfactory results. Also these results were anticipated to provide the shareholders with the best returns in regard to their investment in the group.
To improve on its service delivery and the scope of increasing its profit margin the company initiated a process of disposing some of its unprofitable properties and refineries. Due to the shareholders demands the group has since 2005-2010 embarked on cutting down its global labor force in order to secure $1 billion in savings.
However, as is with strong and uninterrupted focus being on company’s economic discipline including capital efficiency, Royal Dutch Shell has over the last five years been positioned to move on generating shareholder value in its operations and service delivery.
The groups strategies from 2005-2010 was on stringent approach to diversified capital investment, creating a stable balance sheet as well as enhancing service delivery and distribution to its shareholders. This resulted in RDS setting its goals within this period on the scope of prioritizing on the to-most returning investments as a measure of improving the ROCE (return on capital employed) and capital efficiency.
Equally, the group optimized its portfolio within this period by disposing its non-core investments. The proceeds were employed in enhancing debt reductions as well as improving the service delivery to her shareholders.
This resulted in establishing profound financial positions, competitive market control as well as laying emphasis on cost control and operating excellence, hence providing the shareholders with the topmost value and profitable returns.
The success of Royal Dutch Shell plc in delivering value to her shareholders lies to the group’s concept of inspired leadership. The scope of leadership influenced its market position, annual returns as well as its stability in the stock markets.
With sound leadership, solid management procedures and disciplined financial control helped the corporation in providing the shareholders with the expected services reflected in the value of the group. Despite the unstable global energy markets RDS plc continued to explore diverse areas by which the delivery of value was reflected in the group’s profit margin including the groups share index in the leading stock markets globally.
And this is illustrated by the fact that the company has persistently doubled its dividend payment after every six years. The 2009 shares reports testifies to this observation (See Table 2).and this is a instrumental pointer of the groups success in delivering value to its shareholders.
How and why the market value of Royal Dutch Shell plc equity has changed over the past 12 months
The groups combination of strewed executive power together with groups operating authority including its financial responsibility which has been evenly dispersed through its 250 operating organizations, shows that, evaluated against any other oil corporation, its services are compactly decentralized.
However, the economic dynamics and technical realities present in the energy sector have seen it that the group embraces the best service approaches. The group’s matrix system indicates that the group had undergone unprecedented changes within the scope of past 12 months. The scope of these changes touched on the organizations market value affecting the anticipated market capitalization heavily.
Economic instability and the group’s performance have over the period of last one year resulted in decimal RDS market value. As is testified by the group’s quarterly report it is emerging that the group is attempting to reverse the current decline in its sales. For instance, the group’s total revenue moved from 45.66% to $ 130 billion in mid June 2009 (Richardson 2011).
The reason the market value of RDS plc equity has changed can thus be attributed to slow consumption of oil products globally. Also the rate at which shares are plummeting at all major stock markets can be another major reason contributing to these changes.
Equally, the scope of production and price fluctuations has compelled the RDS equity to acquire a new dimension within the 2nd quarter of 2010 which has persistently crossed 2011 1st quarter. As established by 2nd quarter of 2010 the company’s market equity was anchored within the range of $ 434 billion which was substantially lower by 3.0% as compared to $ 447 billion three years earlier.
The drop in value can be attributed to the group’s stock loss which stood at 29.22% from the previous financial year (Iftekhar, et al 2010). Thus, the manner investors are purchasing the groups share can be described as being cautious. This has resulted in the decimal market performance.
Though the company is on the path of restoring its falling market supremacy, it is evident that its market value increased substantially with 115.1% within the 1st quarter of 2011. In essence, within the span of 12 month the group has shown unstable move, despite the fact that its operational margins increased with an average of 29.0% from the previous year.
Return on capital employed as well as ROE (return on equity) were considerably low and this affected the market value of the company’s equity as compared to other competitors in the same 12 months period-June 2010 to June 2011. Basically, it is difficult to simplify the factors affecting the RDS equity value due to the diverse conditions enveloping the entire stock market.
However, the group’s fundamentals which touch on revenues as well as valuation factors are core factors that affected its equity value during this period. Though other factors such as inflation, the groups market behavior, investor behavior, market liquidity and economic circumstances affected the group’s market value negatively.
The manner this occurred can be attributed to RDS plc internal factors such EPS, DPS (dividend per share), as well as the group’s book value (Richardson 2011). Hence, the investor’s reaction to the group’s dividend resulted in the group’s equity devaluation. It ought to be noted that inflation as well as interests during the twelve months had a negative impact on the group’s stock prices.
This observation can be supported by the instances of higher consumer prices, low money supply, as well as interest rates (Haley 2006). Exploring the relationship between inflation and industrial production as well as the stock prices relating to RDS, the monthly results covering June 2010, to June 2011 indicates that the relation of the group’s stock prices and inflation was all time negative.
Also, this can be explained by the group’s poor relationship exposed by macroeconomic factors which are typical within the equity market. Despite the changes that have affected RDS market capitalization within this period, it is evident that the group had exhibited attractive attributes relative to other energy corporations within the leading stock markets such as London, New York, and Amsterdam.
Though, the group’s shares have for the last nine been low due to markets and economic crisis which was experienced in the 2nd quarter of 2009. The group has thus realized that differentials in equity market, differentials growth in stock market and differentials in evaluations distinguish the performances of equity markets globally.
The group’s market capitalization has witnessed massive negative results as is with other super majors. This has resulted in the group inability to enlarge its production and this has considerably affected its market value. Equally, the dwindling investable resource quotas have played a considerable role in the corporation’s profitability in relation to its equities.
Thus, much of the groups remaining pools that are easily accessible and are resourceful to the corporation have been taken by governments which are anticipating controlling the oil production in their distinct regions. And this has resulted RDS plc equity being undervalued. However, RDS has opted to invest in other venues of energy such as natural gas as well as liquefied natural gas in order to boost its market value (Aaseng 2000).
Net Asset Value
Net Asset Value refers to a groups or a company’s total excluding its total liabilities. For instance, if RDS has securities including other assets worth (total assets and total equity) $ 470.573 billion, the group’s total liabilities are $172.78 billion.
Thus, the group’s Net Asset Values is $297.793 billion. Net Asset Value is paramount in regard to valuation of any organization shares especially in areas where the value of the given organization comes from the assets it attains rather that the earnings generated by the given business (Leffler 2010).
Price/ Earnings Ratio
Basically, valuation ratio of any organization current share price evaluated to its PS earnings is typically calculated as:
Earnings per Share (EPS)
Noting that RDS was trading at $20.46 a share while it’s earning over the last 12 months were $ 3.09 per share,thus,the P/E ratio for RDS would be $ 6.60 ($20.46/$3.09).
All in all, higher P/E may illustrate that investors are anticipating for higher earnings in the days to come in relation to organizations with lower Price Earnings Ratio.
Discounted Cash Flow
Royal Dutch Shell reported a 30.2 growth in regard to cash flow as per the latest quarter indicators standing at $9.7 billion, a remarkable increment from $7.40 billion in the similar period a year ago.
When evaluated against year over year growth in duration of one year trailing cash flow of 30.04%, the quarterly increase depicts a decrease in the groups operating income progression, which may likely contribute to fewer earnings. This may compel the organization to cut its operating costs so as to sustain its profit margins.
The groups debts, defined as TD (total debts) minus COH (cash on hand) ranging from $20.03 billion is plainly 1.23 times greater than in relation to the groups last financial period EBITDA calculated to be $19.09 billion (Leffler 2010). What this depicts is that the apparent ratio standing at 41.82% less than it was at the end of the similar quarter a year before, and this is a noteworthy decrease.
Equally, this provides the group with substantial flexibility in the manner it manages its balance sheet so as to stimulate instances of future growth, paying out for it dividend as well as pursuing its premeditated goals such as acquisitions.
In addition, minor signs indicate that Royal Dutch Shell is managing its balance sheet conservatively, its overall debt as a proportion of total capital was lessened during the last 12 months while its COH increased.
The entire debt currently stands for 20.40% of overall capital as compared to 23.5% twelve months earlier, while it had $ 19.40 billion in COH last financial period, 62.04% more than as it was recorded at the end of the previous year.
These key developments have enhanced the group’s fundamental flexibility in preparing the ground for the future growth and development opportunities so as to enhance its overall returns to its shareholders. Also, to measure the true economic income generated by Royal Dutch Shell during the past twelve months, operational costs as well as cost of capital, both debt and equity are considered.
Hence, based on the twelve month period trailing operating revenue, the group had a sum of 17.81% return on its $196.95 billion of sum invested capital, which comprise ordinary and preferred equity, in addition to long term debt (Leffler 2010).
Its total subsequent to tax cost of capital is profoundly slanted towards equity, through a total after tax expenditure of 6.70% weighed against to a 0.21% cost of arrears The group’s EVA (economic value added), which is attained from deducting the 7.00% overall cost of assets from its ROI (return on investment), is 10.80%. This is a concrete return to investors for a twelve months period.
The corporation increased its monthly common share on December 31, 2010 by 5.01%, to 85.00 cents a share from 79.05 cents (Iftekhar,et al 2010). It has at this moment spread dividends continually for the past five years and based on this latest disbursement the stock is now yielding 5.00%.
The $10.40 billion in ordinary dividends remunerated by the corporation last quarter was responsible for 32.0% of its cash flow in addition to 16.0% of overall earnings after taxes. This comparatively reserved payout was lesser than the 19.10% of revenues paid out in the twelve months which had ended immediately a quarter earlier (Tabak 2010).
Combined with commonly positive fundamentals, the present payout point affords the corporation suppleness in raising its share in the future devoid of eating into its balance sheet should it desire to do so (Tabak 2010).
Basically, there are diverse methods employed by firms to critically evaluate their performances. Hence, there those procedures which are fit for specific businesses. Thus, in as far as the Royal Dutch Shell is concerned the above explored procedures shed light on the best method which can be employed to provide the reliable results.
Looking at the values provided it is apparent that all the procedures examined have each provided a distinct value for the company. However, correlating the market performance with the groups equity discounted cash flow can be said to have provided the utmost value for the group.
The significance of the value provided by discounted cash flow is that it generates values close to ISV (intrinsic stock value) (Shaxson 2010). Also, the groups DCF can be said to be relative to the diverse evaluation procedures, which are in essence exploits multiples to evaluate stocks as demonstrated in the stock markets.
Some of these relative valuations favoring DCF are linked to price earnings, price-to-sales as well as EV/EBITDA ratios which are essential in evaluating the group’s performance. What this depicts is that DCF depends on the scope of free cash flow (Davidson 2009).
More so, free cash flow has been established to be a reliable measure that easily penetrates through the stock market estimates commonly embraced in groups reported earnings.
Thus, regardless of whether the scope of cash outlay is considered as an expense or equally declared as an asset on the balance sheet, as per DCF, free cash flow is employed to track the groups fund left over for the shareholders. And this makes the value arrived at through a DCF to be the most appropriate for the group (RDP 2006; Teall 2004).
Between early 2009 and 2011 the petroleum industry experienced unprecedented economic challenges due to the unstable global economy. This has also been attributed the Arab revolution and civil instability in some of the oil producing countries.
From the fundamental perspective of global economy Royal Dutch Shell faced compact competition from other sources and this affected its market performance including the value of its equity (Brown,2007). Also the parallel loss of control over certain sources in both Africa and Caribbean saw its profit margin decreasing over the last 12 months.
However, as the world economic powers are in the verge of restructuring the global economy the group has since the last quarter of 2010 posted positive results as demonstrated by its shares in all major stock markets.
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Table 1 source: Levinson (2010)
Source: Richardson (2011)