Shell’s Earnings To Witness A Jump Backed By Improving Commodity Prices

by Trefis Team
Royal Dutch Shell Plc.
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Royal Dutch Shell (NYSE:RDS.A), the European integrated energy company, is slated to release its December quarter and full year 2017 financial performance on 1st February 2018((Royal Dutch Shell To Announce December Quarter 2017 Results, 21st December 2017, The market expects the company to report a solid improvement in its quarterly as well as annual revenue driven by improved price realization for its upstream operations and higher margins for its refined and chemicals products. Further, the company’s efforts to reduce its operating costs and capital spending are likely to boost its bottom-line for the year. 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 with its current market price.

See Our Complete Analysis On Royal Dutch Shell Here

Key Trends Witnessed In 4Q’17

  • With the extension of the Organization of Petroleum Exporting Countries’ (OPEC) production cuts in the fourth quarter, commodity prices witnessed a sharp rise. The WTI crude oil prices averaged at $55.26 per barrel for the December quarter, notably higher than the $48.18 per barrel of the previous quarter. For the full year 2017, WTI oil prices stood at $50.80 per barrel, 17% higher than 2016. Thus, we expect this higher price realization to boost Shell’s upstream revenue for the quarter as well as full year 2017.
  • During the fourth quarter, Shell announced the cancellation of its scrip dividend program and reinstated cash dividends with effect from the declaration of the interim dividend for the fourth quarter of 2017 in February 2018((Shell Announces Cancellation of Scrip Dividend Program, 28th November 2017, This is great news for the shareholders, who will receive their complete dividend payments in cash, unlike previously when they had an option to receive their dividend in cash or shares.

  • Apart from the scrapping of the scrip dividend, the company also increased its annual organic free cash flow target to around $25-$30 billion by 2020, assuming Brent crude oil prices stay at $60 per barrel. The new estimate is almost $5 billion higher than the company’s outlook back in June 2016 and is largely driven by the optimistic outlook for commodity prices.
  • Shell plans to restrict its annual capital investment to $25-$30 billion over the next three to four years. In case the commodity prices recover faster than expected, the company plans to cap its investments at $30 billion and use the excess cash flows to accelerate its debt reduction.
  • Further, the integrated company confirmed its plans to extend its share repurchase program to at least $25 billion, to be completed between 2017 to 2020, subject to the progress of company’s debt reduction program and the overall recovery in oil prices. While Shell will be able to repurchase shares only after it has met its debt reduction and dividend payment requirements, the company’s willingness to utilize its surplus cash flows to reinstate its share repurchase program is a positive one for its shareholders.

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