Shell Posts Stellar 1Q’17 Earnings; Banks On New Projects And Divestment For Future Growth

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RDSA: Royal Dutch Shell logo
RDSA
Royal Dutch Shell

Beating the market expectations, Royal Dutch Shell (NYSE:RDS.A) reported a remarkable March quarter last week, with adjusted net earnings of $0.92 per ADR((Royal Dutch Shell Announces March Quarter 2017 Results, 4th May 2017, www.shell.com)), 18 cents higher than the analyst estimate. This earnings surprise was driven by the surge in commodity prices and better-than-expected refining margins in the first quarter of 2017. Shell’s 1Q’17 performance was in tandem with the trends depicted by its American counterparts, Exxon Mobil and Chevron, and caused its stock price to shoot up by almost 3% post the announcement of the results. Going forward, the integrated energy company will continue to manipulate the four levers – divestment, capital investment, operating costs, and new projects – in order to improve its liquidity and shareholder returns.

See Our Complete Analysis On Royal Dutch Shell Here

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Key Highlights of 1Q’17 Performance

Given the rebound in the commodity prices in the last few months, Shell witnessed a surge in its integrated gas and upstream businesses. While the integrated gas division was driven by favorable market conditions, higher LNG volumes, and an increased contribution from trading, the upstream results were boosted by higher price realizations as well as strong production growth during the quarter. Moreover, the performance of the company’s downstream operations also improved due to higher-than-anticipated refining and cracker margins in all the regions except the US West Coast and Singapore. Consequently, Shell’s 1Q’17 revenue stood at $71.8 billion, almost 50% higher compared to the same quarter of last year.

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On the financial front, Shell managed to significantly increase its cash flow from operations to $9.5 billion from merely $661 million in the year ago quarter. Consequently, the company’s cash balance at the end of the quarter rose to $19.6 billion from $11 billion in the same quarter of last year. On the flip side, the company’s long term debt jumped from $73 billion to $83 billion during the quarter, pulling up its net debt position. That said, the European company continued to pay quarterly dividends of $0.47 per share to its shareholders. This reiterates the company’s focus on returning value to its stakeholders even in a weak price environment.

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Pulling Levers To Survive The Downturn

As mentioned earlier, Shell has been focused at maneuvering four main levers – divestments, capital investment, operating costs, and new projects – in order to weather the ongoing commodity slowdown.

Firstly, the company plans to sell-off its non-core and/or non-strategic assets, with an aim to re-shape its portfolio to make it more competitive, and to optimize its capital structure and enhance shareholder returns. In the first quarter, the company made strong progress in achieving its divestment target of $30 billion in the 2016-2018 timeframe. The company had completed $5 billion worth of asset sales in 2016, and announced another $15 billion of deals in the last 4 months. Thus, the oil and gas giant is on track to achieve its asset sale target well ahead of schedule.

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Secondly, despite the improving outlook of the commodity markets, Shell continues to curb its capital investment in the forthcoming years in order to preserve its liquidity. Going forward, Shell will continue to spend between $25 billion and $30 billion each year until 2020 and focus on enhancing the economic viability of its existing assets and investing on high-margin projects to boost its future value.

Further, Shell has been consistently working towards streamlining its operations and bringing down its cash costs in order to sustain its margins. In the March quarter, the company managed to reduce its operating costs to $9.7 billion, versus $10.6 billion in the year ago quarter. The oil and gas company will continue to restrict its costs and keep them under $40 billion for the full year 2017.

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Lastly, the integrated energy company has a robust pipeline of projects that are under-construction and are likely to start-up in 2017-2018. By 2018, projects that were started since 2014 are likely to produce more than 1 million barrels per day, and operate at cash operating costs of less than $15 per barrel of oil equivalent (boe). Consequently, these projects are expected to generate roughly $10 billion of cash flows from operations, at an average of $60 per barrel oil prices and 35% tax rate. Thus, we believe that these new projects will augment the company’s future growth and value.

Overall, we believe that Shell has laid down an extensive strategy for the next few years that will enable the company to reshape its operations and emerge out of the ongoing commodity slump.

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