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Shell - profits beat forecasts

George Salmon | 2 May 2019 | A A A
Shell - profits beat forecasts

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Royal Dutch Shell Plc B Shares EUR0.07

Sell: 2,270.00 | Buy: 2,271.00 | Change 7.00 (0.31%)
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Shell has delivered underlying adjusted earnings of $5.3bn, down 2% on a year ago due to higher corporate losses, but ahead of prior consensus.

The shares rose 1.5% on the news.

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Our View

Having nursed the dividend through the bad times of the 2014/15 oil price crash, 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.

In 2018, Shell generated enough cash flow to fund the buyback, which is set to go through at a rate of $2.75bn a quarter, fund the significant capex spend and still knock over $5bn off the debt pile. Add in the impact of asset sales and the disposal of shares in other interests, and the group's net debt position actually improved by around $14.5bn over the year.

Those lower debts mean the balance sheet looks much stronger than it has for some time. Debt ticked up in Q1, but forecasts are for it to fall back over the remainder of the year. And with cost savings and production increases kicking in, Shell looks well-placed to fulfil its promises on the buyback. But of course there are no guarantees here.

A lower number of shares should boost earnings per share, and reduce the cash burden of the dividend. The prospective yield of 5.8% looks attractive to us, despite a lack of meaningful growth in the years ahead.

Still, investors shouldn't forget all the good news is predicated on a favourable oil price. Today the price of a barrel of oil is just over $70, but back around the turn of the year it had fallen to close to $50. Given the progress on cutting debt, that's still reasonably comfortable for Shell, but the drop shows that conditions can change quickly.

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Q1 trading details (underlying figures)

Upstream profits rose 11% to $1.7bn as lower costs and higher volumes, mainly from the US Gulf of Mexico and shale operations, offset the impact of a 5% drop in realised oil prices. Production rose 1%, boosted by North America and the reclassification of the Salym asset from Integrated Gas.

Downstream profits rose 3% to $1.8bn, boosted by a strong quarter from the refining and trading business, where earnings more than doubled to $343m. . The dominant marketing division, which includes retail fuel and lubricants, saw profits rise 10% to $1bn. Chemicals earnings fell 34% to $451m, reflecting lower margins in tougher markets.

The Integrated Gas division saw adjusted profits rise 5% to $2.6bn due to higher realised prices and a lower depreciation bill, which more than offset the lower production, which was hit by the loss of Salym.

Central Corporate losses were $671m.

Shell's underlying operating cash flows increased from $10.4bn to $11.3bn year-on-year, reflecting the group's higher earnings. However, on a quarter-on-quarter basis cash flow fell by $1.6bn. Free cash flow of $4bn was more than offset by dividends, buybacks and interest costs, with net debt rising by $4.7bn in the quarter.

That underlying increase, and a change in accounting rules, means gearing, which compares the net debt position to capital, rose from 20.3% to 26.5% during the quarter.

Looking ahead, Shell remains confident in its 2020 outlook.

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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.

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