Shell’s Stellar Earnings Fail To Impress The Market; Will Continue To Restrict Capex And Operating Costs

by Trefis Team
Royal Dutch Shell Plc.
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As expected, Royal Dutch Shell (NYSE:RDS.A), the European integrated energy company, posted a strong financial performance for the December quarter and full year 2017 financial performance on 1st February 2018((Royal Dutch Shell Announces December Quarter 2017 Results, 1st February 2018, While the company showed remarkable improvement in its top-line as well as bottom-line compared to the previous year, it missed the consensus earnings estimate by a small margin, causing its shares to remain subdued despite reporting a stellar performance for the quarter.

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 Highlights of 4Q’17 Earnings

  • Shell witnessed a 30% jump in its 2017 revenue driven mainly by higher commodity and LNG prices, improved refining performance, and better-than-expected production from new fields, which was partially offset by field declines and divestments.
  • The Integrated Gas operations saw a rise in its LNG sales due to increased volumes from the Gorgon LNG project. Further, higher LNG prices, lower taxation and depreciation bolstered the earnings of the division.
  • Upstream operations also experienced a strong improvement in its production volumes, mainly due to new field start-ups and continued ramp-up of existing fields in the Santos Basin in Brazil, Kashagan in Kazakhstan, and Malikai in Malaysia and Stones in the Gulf of Mexico. Further, the rebound in commodity prices resulted in higher price realization of oil and gas output, which augmented the recovery of Shell’s upstream earnings.

  • Downstream operations benefited from higher refining and trading volumes and margins through the year. The chemicals earnings also improved due to a better market environment and higher sales volumes.
  • During the year, Shell generated cash flows of around $39 billion (excluding working capital movements) from its operations, and utilized it to pay down $9 billion of its debt. Further, the company paid dividends of $15.6 billion during the year, and cancelled the scrip dividend program in the December quarter, implying that the fourth quarter 2017 interim dividend and future dividends will be settled entirely in cash, rather than the share-based alternative offered by the company earlier.

Pulling Levers To Survive The Downturn

Shell has been focused at maneuvering four main levers (described below) to improve its performance in the ongoing commodity slowdown.

  • Divestment – Shell has completed asset sales worth $24 billion in the 2016-2017 time frame, and has another $6 billion worth of deals in progress. This has put the company on track to achieve its divestment target of $30 billion by the end of 2018.
  • Capital Investment – Over the last three years, Shell has significantly reduced its capital spending (including BG Group) in order to weather the slump in commodity prices. Since the outlook for the markets remains uncertain, the company plans to restrict its capital investment in the range of $25 to $30 billion between 2018 and 2020. This will not only allow the company to focus its investments on high-margin projects, but also enable them to manage their cash flows if the commodity markets do not rebound as expected.

  • Operating Costs – In order to sustain its profitability in the current volatile market, Shell has been working to reduce its operating costs over the last three years. For 2017, the company had targeted to keep its operating costs below $40 billion. But, due to its relentless efforts it managed to deliver the operating costs almost $2.5 billion below $40 billion, which gave a boost to its earnings.
  • 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 2020.

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