Depressed Commodity Prices And Weak Downstream Margins Pulled Down Shell’s 2Q’16 Earnings

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RDSA: Royal Dutch Shell logo
RDSA
Royal Dutch Shell

Royal Dutch Shell Plc. (NYSE:RDSA), one of the major integrated oil and gas companies, reported a massive decline in its June quarter 2016 earnings on the back of persistently low commodity prices. [1] As a result, the company’s stock dropped almost 3% on Thursday, 28th July 2016, post the announcement of its results.

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Although the company’s production as well as price realizations were higher due to the sharp recovery in oil prices over the last three months, its 2Q’16 revenue stood at $58.4 billion, close to 20% lower compared to the same quarter last year. The majority of this plunge was due to the unexpectedly weak downstream margins realized by the company during the quarter. This decline was partly mitigated by the integration of BG Group results in the second quarter. On the cost side, Shell managed to cut down its operating costs (including BG) by almost $4 billion in the quarter. Yet, its earnings declined to 13 cents, roughly 80% less compared to the second quarter of last year.

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In order to manage its cash flows, Shell reduced its capital expenditure by over 10% on a year-on-year basis in the June quarter. However, it continued to pay a strong dividend to its shareholders, despite the ongoing commodity slump. As a result, the company cash outflows were significantly higher than its cash flows from operations.

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Source: Company Presentation

Going forward, the oil and gas company aims to reduce its 2016 capital spending to $29 billion, close to 20% less compared to 2015, to better manage its finances. Further, the company has been aggressively divesting its core as well as non-core assets to finance its future projects. It aims to complete the sale of around $6-$8 billion by the end of the year. In addition, Shell has been proactively reducing its operating costs and investing in new high-margin projects to maintain their operating margins in these turbulent market conditions. It aims to bring down its operating costs to $40 billion, approximately 13% lower compared to the last year. All these efforts are likely to help the company weather the current low price environment more efficiently.

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Source: Company Presentation

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Royal Dutch Shell

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Notes:
  1. Royal Dutch Shell Announces Second Quarter 2016, 28th July 2016, www.shell.com []