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Royal Dutch Shell - Revenues, Profits and Cash surge

Nicholas Hyett | 27 July 2017 | A A A
Royal Dutch Shell - Revenues, Profits and Cash surge

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Royal Dutch Shell Plc B Shares EUR0.07

Sell: 2,268.50 | Buy: 2,269.50 | Change -35.00 (-1.52%)
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Royal Dutch Shell saw second quarter profits rise dramatically to $3.7bn on a current cost of supplies basis excluding identified items (Q216: $1.1bn). The dividend remains unchanged at $0.47 a share.

The shares were broadly unmoved following the announcement.

Our View

There's a lot to like in Shell's results, with all the major metrics heading in the right direction. The strong free cash flow performance is particularly eye catching, more than covering the cash portion of the dividend and raising the possibility of scrapping the scrip dividend this year.

Achieving that at a sub $50 a barrel oil price, while also carrying out and integrating the major BG acquisition, is undeniably impressive - although much of the profit is coming from the downstream business rather than the well head, where low prices continue to hold back performance.

If we had a slight concern it's that capital expenditure remains at rock bottom, and is less than half the combined total of depreciation and asset sales. The group is performing well for now, but at some point it will have to fork out to replenish the oil it's currently pumping and selling.

The still significant debt pile may hamper investment in the near term and could continue to soak up cash, holding back dividend growth to boot. While asset sales and an improving cash flow position mean that net debt is falling rapidly (down $5.7bn this quarter), Shell would still need to repay around $29.6bn if it wanted to return to the level of gearing it had before the BG deal.

Fortunately the group still has some way to go on its planned asset disposals and that should provide a cash infusion, with the rate of disposals likely to tick up from here. Shell has also taken $10bn of operating costs out of the combined BG/Shell business relative to two years ago, boosting profits, but there is probably more to be done.

Shell's prospective yield has come back a bit in recent months, a reflection of the group's improved cash position, but at 6.7% is still high. With the outlook for oil prices still uncertain that's perhaps unsurprising, a major retreat could quickly put the balance sheet back under the microscope.

H1 Results

Second quarter revenue of $72bn increased 23.4% compared to a year earlier. The improved performance was driven by a substantial improvement in the Downstream business, which handles refining, marketing and chemicals.

Downstream was also the largest contributor to earnings, at $2.5bn, with Integrated Gas stepping up earnings to $1.2bn.

The Upstream oil and gas production business moved into positive territory with earnings of $339m, benefitting from an improved oil price environment. The average realised price for liquids rose 16% to $45.62 dollars a barrel, while gas prices rose 31% to $4.22 per mmBtu. Total production remained broadly flat at 3.5m barrels of oil equivalent a day.

Positive working capital movements supported a free cash flow in the quarter of $12.2bn, thanks in part to $5.6bn worth if disposals and a $2.3bn working capital improvement. However, even without this boost, free cash would have comfortably covered the $3bn cash dividend expense.

Capital expenditure in the quarter was $5.7bn, slightly behind the same quarter last year. The majority of this expenditure was in made in Upstream, as a result of the acquisition of Marathon Oil Canada.

Net debt has continued to fall this quarter, and now stands at $66.4bn. This represents a gearing ratio of 25.3% (Q1 2016: 28.1%), meaning net debt is now only slightly over a quarter of total capital.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.