Shell Posts A Strong Improvement In Its 3Q’16 Earnings Backed By Higher Production and Cost Reduction Measures
Similar to its European counterpart, BP Plc., Royal Dutch Shell (NYSE:RDS.A) posted a drastic improvement in its third quarter earnings on the back of higher production and stronger price realizations during the quarter. While the Netherlands-based company exceeded the market expectations on the revenue front, it could not meet the consensus estimate for the third quarter earnings due to higher-than-expected depreciation and interest expense. However, the investors saw the company’s results in a positive light, causing its stock to shoot up by almost 5% post the announcement of the results.
Source: Google Finance; US Energy Information Administration (EIA)
Operational Highlights
Shell’s upstream and integrated gas production for the September quarter grew significantly, both sequentially as well as annually. The company’s integrated production rose to 912 thousand barrels of oil per day in the third quarter, 38% higher compared to the last year and 3.6% higher than the previous quarter. This growth was primarily driven by the acquisition of BG Group in the first quarter of this year. Further, the oil and gas majors’ upstream production also increased more than 20% compared to the same quarter of last year and 2% compared to the last quarter. This surge in production, coupled with better-than-expected price realizations, enabled the company to post third quarter revenue of $61.85 billion, roughly 6% more than the second quarter of 2016. 
On the cost front, Shell continued to progress towards its objective of reducing its operating costs by $9 billion by the end of 2016 compared to the consolidated costs of Shell and BG in 2014. The company announced in its latest earnings call that it had realized its target ahead of schedule and is likely to achieve cost savings greater than $9 billion by the end of the year. Based on these cost savings, the company’s operating margins is expected to improve over the next couple of quarters.
Source: Royal Dutch Shell’s 3Q’16 Presentation
Apart from controlling its operating costs, Shell aims to restrict its 2016 capital spending to $29 billion, close to 20% less compared to 2015, to better manage its finances. For 2017, the company plans to keep its capital expenditure budget at $25 billion, lower from its previous guidance of $25-$30 billion. For the remaining years of this decade, the integrated energy company targets to spend $25-$30 billion on capital development. Lower capital expenditure will enable the company to conserve its cash flows and focus on investing in higher margin projects.
Further, the oil and gas company has been aggressively divesting its core as well as non-core assets to finance its future projects. Year-to-date, the company has completed asset sales of $1.7 billion and has announced deals worth $3.3 billion that are likely to be completed by the end of this year. Thus, Shell is on track to achieve its goal of $6-$8 billion of divestment in 2016. Overall, the integrated company has a target of divesting $30 billion worth of assets between 2016 and 2018.
Finally, Shell has a strong portfolio of projects that are likely to come on line in the next couple of years and is using the cash saved from lower capital expenditure to invest in new and promising projects. Since these are likely to be high-margin projects, the company expects them to be accretive to its existing projects and deliver better returns even in a low price environment.
Have more questions about Royal Dutch Shell (NYSE:RDSA)? See the links below:
- Shell’s 3Q’16 To Witness A Jump Backed By The Recovery In Commodity Prices
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- How Much Value Does Shell’s Upstream Operations Contribute To Its Total Equity Value?
- How Will Shell’s Upstream Production Change In The Next Five Years?
- Here’s Why We Think Shell’s Stock Price Is Worth $53 Per Share
- Shell’s 2Q’16 Earnings Expected To Suffer As Commodity Prices Remain Depressed
- What Is Shell’s Strategy To Combat The Commodity Downturn Over The Next Two Years?
- How Will Shell’s Revenue Be Impacted If Crude Oil Prices Average At $50 Per Barrel Till 2018?
- How Will Shell’s Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
- Why Are Shell’s Upstream Operations More Important Than Its Downstream Operations?
- How Much Value Will The BG Group Acquisition Add To Royal Dutch Shell?
Notes:
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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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