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Royal Dutch Shell - Profit surges, cash flows and debt falls

Nicholas Hyett | 31 January 2019 | A A A
Royal Dutch Shell - Profit surges, cash flows and debt falls

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Royal Dutch Shell Plc B Shares EUR0.07

Sell: 2,255.00 | Buy: 2,256.50 | Change -26.50 (-1.16%)
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Fourth quarter profits rose 32% on an underlying basis to $5.8bn. That's slightly behind 36% growth for the full year, which reached $21.9bn and reflected significant improvements in oil and gas prices.

Free cash flow for 2018 was 43% ahead of a year earlier, despite an increase in capital expenditure and fewer disposals.

The dividend remains unchanged at $0.47 per share, with the group launching another $2.5bn share buyback.

The shares rose 3.1% 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. Having nursed the dividend through the bad times, Shell's now got the cash to reward shareholders for their loyalty, and is working through tranches of a $25bn buyback.

The driving force behind progress has been a dramatic improvement in oil prices, but Shell deserves credit too. Operating expenses have been kept under control, and the group has been managing capital expenditure while still developing some major new projects.

But the real acid test is cash flow. 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, and quarterly operating cash flow is now easily covering the dividend and capex spend. In fact in the last quarter of 2018, there's been enough cash flow to fund the $2.5bn a quarter buyback and still knock $9bn of the debt pile.

Going forwards there should be scope for more cost savings and production increases too. Potentially driving profits and free cash higher.

This all means Shell's in increasingly good shape. The prospective yield of 6.4% look attractive to us, despite a lack of meaningful growth in the years ahead. Of course investors shouldn't lose forget all the good news is predicated on a favourable oil price

Less than a month ago the oil price had fallen below $51, and today has only made it back to a little over $60. Given the progress on cutting debt, that's still very manageable for Shell, but there's no guarantee things can't unravel further.

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Full year results

Full year production is more or less unchanged year-on-year at 3.7m barrels of oil equivalent per day (boepd). That follows a slight increase in LNG production, more than offsetting a decline in Upstream production. However, average realised oil prices rose 30% to $63.85, while natural gas prices rose 18%.

Those higher prices delivered significant boosts to both the Integrated Gas and Upstream businesses. Underlying profits in the two businesses rose 78% and 119% to $9.4bn and $6.7bn respectively.

Higher operating expenses in Refining & Trading and Chemicals saw underlying profit fall 39% and 21% respectively. Consequently overall Downstream underlying profits fell 17% to $7.6bn.

Capital expenditure for the full year rose 10% to $23bn, while total divestments of $7.1bn were 59% lower than in 2017. Shell also completed $4.5bn share buyback during the year.

Despite those expenses, organic cash flow meant net debt fell $14.5bn to $51.4bn, representing a gearing ratio of 20.3% (net debt as a percentage of total capital).

Guidance for the first quarter of 2019 is for both Integrated Gas and Upstream production volumes to fall following disposals made in the last year. Refinery availability is also expected to be lower.

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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 disclosure for more information.