Shell’s Stock Rises On Strong 3Q’17 Performance
Royal Dutch Shell (NYSE:RDS.A), the European integrated energy company, surprised investors with a strong improvement in its September quarter performance. The company exceeded the market estimate for revenue backed by higher price realization for its upstream operations and higher margins for its refined and chemicals products. Further, the company continued to reduce its operating costs and capital spending, which provided a boost to its third quarter earnings. Going forward, Shell will continue to focus on the delivery of its new projects, which are likely to drive its value in the long term. We have a price estimate of $63 per share for Royal Dutch Shell, which is in line its current market price.
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Key Highlights of 3Q’17 Earnings
- During the third quarter, Shell’s upstream production remained flat compared to the same quarter of last year, as the new field start-ups and ramp-up of existing fields – the FPSOs in Brazil, Kashagan in Kazakhstan, Stones in the Gulf of Mexico, and Gorgon in Australia – was offset by the impact of field declines and divestments. However, the company saw improvement in its oil and gas price realizations during the quarter, which resulted in a jump of $960 million in its upstream earnings.
- The LNG liquefaction volumes rose by 10% on a year-on-year basis due to the volumes driven by the three LNG trains operational in Gorgon, as opposed to one train in the year ago quarter. Consequently, the earnings from the Integrated gas division almost doubled to $1.2 billion compared to last year.
- Shell’s downstream operations continued to dominate its profitability in this quarter as well. Its downstream operations, particularly refining and chemicals, witnessed positive industry trends during the quarter, resulting in earnings of $2.4 billion in 3Q’17 versus $1.6 billion in 3Q’16.
Pulling Levers To Survive The Downturn
Shell has been focused at maneuvering four main levers (described below) to weather the ongoing commodity slowdown.
- Divestment – So far, Shell has completed asset sales worth $20 billion in the 2016-2017 time frame, and has received a sum of $11 billion in cash for these deals. It has further announced sales of $2 billion, which are likely to be closed by the end of the year, taking the total of its divestment program to $22 billion. The company indicates that it has more than $5 billion worth of deals in the pipeline, implying that it is on track to achieve its divestment target of $30 billion by the end of 2018.
- Capital Investment – Given the slump in the commodity prices, Shell has reduced its capital spending (including BG Group) by $20 billion between 2014 and 2016. Since the outlook for the markets is still uncertain, the company plans to restrict its capital investment to $25 billion in 2017, and in the range of $25 to $30 billion between 2018 and 2020.
- Operating Costs – Shell has managed to reduce its operating costs by roughly $11 billion, or more than 20% since the onset of the commodity downturn in 2014. This has enabled the company to sustain its margins in this slowdown. For the current year, the company expects to keep its operating costs below $40 billion.
- Delivery of New Projects – Shell has a robust portfolio of projects that have either become operational or are expected to come on-stream soon. Some of the projects that are now producing include Stones deep-water oil and gas project in the Gulf of Mexico (GOM), the Kashagan field in Kazakhstan, and Queensland Curtis Liquefied Natural Gas (QCLNG) plant in Australia. These projects are expected to produce more than 1 million barrels of oil equivalent per day, and contribute $10 billion in cash flows by 2018.
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