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Royal Dutch Shell - Profits jump, but cash drags

Nicholas Hyett | 26 April 2018 | A A A
Royal Dutch Shell - Profits jump, but cash drags

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First quarter underlying profits rose 41% to $5.4bn, driven by strong performances in Upstream and Integrated Gas, thanks to an improving oil price. However cash generation remained broadly unmoved.

The quarterly dividend remains unchanged at $0.47.

The shares fell 2% in early trading.

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Our View

There's been a lot to like in Shell's recent results, with all the major metrics heading in the right direction. Profits are up and while cash flow may not be quite as strong as hoped, it's still substantial.

The driving force behind progress has been a dramatic improvement in oil prices, but Shell deserves credit too. Operating expenses have been falling, down almost $800m in 2017, and the group has been managing down capital expenditure while still adding more than enough to reserves to replace last year's production.

However, not for nothing do investment bankers say "cash is king".

Cash is what a company actually has in the bank to fund investment, service debt and pay dividends. Shell is a monster when it comes to cash generation, with operating cash flows of $9.4bn last quarter.

Unfortunately, there are also monster demands on its cash. Capital expenditure cost $4.8bn last quarter, interest on debt $737m, and dividends $4bn.

For now things are being kept ticking over by a huge asset disposal programme, which saw the sale of $1.3bn of assets last quarter. All that extra cash helped Shell cut net debt, and disposals are expected to tick along at over $5bn a year going forwards.

However, longer term that cash will be needed to fund the "at least $25bn" of share buybacks the group plans to complete by 2020. If Shell is to meet all its commitments to shareholders and continue to see net debt fall, it needs to swell it's already formidable cash flow even further.

Nonetheless, we think Shell's prospects are good - always assuming, of course, that the oil price doesn't catch a cold. Market conditions across all the divisions are improving, there should be scope for more cost savings and production increases. That should drive profits and free cash higher.

The prospective yield has come back a bit in recent months, a reflection of the improved cash position, and currently stands at 5.3%. That remains well above the market average. But with plenty of other demands on cash, growth might be thin on the ground.

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First Quarter Results

The Upstream business (which includes Shell's exploration and production arm) saw underlying profits rise 187% to $1.6bn. This was driven by higher prices, with volumes actually falling 5%. Average realised oil prices were up 25% to $60.66 a barrel, while average gas prices rose 13%.

Cash flow from the division fell 8%, despite the improved profitability. That follows higher tax payments, portfolio impacts and lower dividends received compared with the same quarter last year.

Capital investment in Upstream fell 13% to $2.5bn.

Integrated Gas saw underlying profits rise 107% to $2.4bn, with increased volumes, higher prices and trading all contributing. Greater profitability drove a 31% increase in cash flow.

Capital Investment rose 63% to $1.3bn.

Underlying profits fell 32% in Downstream to $1.7bn. This was driven by a significant deterioration in profits from Refining & Trading, although the Chemicals business also struggled. Cash flow from the division fell 16%.

Capital investment rose 31% to $1.4bn.

Group free cash flow was flat year-on-year at $5.2bn, with net debt flat quarter-on-quarter at $66.1bn. Gearing (net debt as a percentage of total capital) showed a slight improvement on the previous quarter.

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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 for more information.


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