Shell Refining (4324)-- Version III

Briefing- Shell Refining Company is a refining company,they do not do oil-rig. If you still not sure about what is this Shell doing, can visit to my research before. There Version I and Version II.


If you already read my research about Shell, you will find that Shell Refining Company is not growing and expanding. The only reason we will invest in it, is to enjoy the dividend. But, here is the problem. The EPS has nothing to do with dividend, as the EPS include stockholding gain, which is not cash! For example, in 2007, Shell EPS is RM1.97. But, does it having net cashflow RM2 per share? I doubt on this. There is the reason i start to spend my time to investigate the variables and how we can determine the cash surplus of Shell. This is important as the dividend is payout according to cash surplus!

So, we have a first important variable, termed refining margin. Above diagram show us that the simple idea about how to calculate refining margin. From the diagram, we also know the variable that affect the refining margin.

Second important variable, must be sales in barrels. The volume of sales definitely will affect the income of SRC. Do not consider revenue in Ringgit as the refining margin and sales price vary every year. So, the above diagram confirm that sales of SRC is not growing. 2007, the sales in barrels are 41Million.


3rd, after we have income, we must deduct the expenses. Above diagram give us another summary about the capacity of SRC and capital that used every year. I have a better idea about this calculation. Be patient!


4th, above diagram is the crude oil price until 2007. But it is enough to tell us the secret about relation in between Shell Cashflow and crude oil price.

After talking so much, whats are the refining margin amount?

There are refining margin of SRC from 2003 till 2007. You should click google advert everyday as i help you to get all these chart! Thanks!

Before that, we are having some argument. Does Shell receive benefits or harm when crude oil price increases? Now, we have facts to end this argument. Please study the chart in JUN 06, see the sharp fall in both diagram? Still not convincing? study both diagram in OCT 03 and OCT 04.
The price trends are simultaneous. So, good news here! with increment on crude oil price, refining margin increases. But, please bear in mind, sales in barrels may reduce.


Here, come to the most important part. Just to remind you, i would like to find out the net cashflow by Shell. I assume a formula, predicted cash receive by SRC:
Cash = (sales in barrels*refining margin*exchange rate)-all expenses.

The total expenses, we may get it from income statement. Suprise! My own calculation is almost match all numbers (cash before working capital changes) from annual reports in 5 years!
So, this becomes clear. The variables that affect cash received by SRC is Sales Volume, Refining margin, exchange rates, and expenses. Exchange rates and expenses can be considered constant.

The bottom table show us the net cashflow in column cash surplus. Cash per share is the true earning power by SRC, without stockholding gain.


Let us practice how to calculate the return of Shell compare to its share price now. Let us take the SRC price at RM11. As the crude oil price is still hiking, i predict refining margin 08 is USD7.20. exchange rates is 3.10. sales 08 is 41Million. The predicted cash received is RM915,000,000. expenses is around RM55Million. The cash is RM860,000,000. We apply the maximum ratio, 2.5. Cash before investing is RM344,000,000. If SRC invest RM44,000,000 in plant 2008, the net cashflow is RM300,000,000. Cash per share is RM1.00 as it is having 300,000,000 issued share. The return rate is about 9-10%. Dividend yield is around 5-7%, which is 55sen to 80sen.

SHELL I
SHELL II
OTHERS