Shell’s best profit in 3 years marred by cashflow drop

by BLOOMBERG

LONDONThe oil-price rally worked both ways for Royal Dutch Shell plc as improved exploration and production lifted profit to a three-year high while refining and trading fell short of expectations as margins shrank.

Crude’s surge raised adjusted profit at Europe’s largest energy company to US$4.3 billion (RM16.77 billion) last quarter, the highest since 2014. While the bottom line was better than expected — and Shell is making as much money with oil at US$60 a barrel as when it was US$100 — cashflow was the weakest since 2016.

“Unfortunately, resilient earnings do not appear to have translated into cash generation,” RBC Capital Markets analyst Biraj Borkhataria said in a note. “This result leaves gearing falling by less than we expected” and could temper hopes of a share buyback programme in the very near term, he said.

Shell’s B shares fell as much as 4%, the most since May, and were 2.2% lower at 2,442 pence at 8:03am in London yesterday.

Oil majors including Shell have cleaned up their balance sheets to survive the worst industry downturn in a generation, eliminating expensive projects and laying off staff to cut capital expenditure. After those efforts and a recovery in oil prices, some analysts predict a bright 2017.

Goldman Sachs Group Inc’s Michele Della Vigna said it could be Big Oil’s best year in decades, so long as companies maintain discipline.

Higher earnings and cashflow in 2017 are helping CEO Ben Van Beurden cut debt, which rose to a record of almost US$78 billion following the acquisition of BG Group plc. He can claim the company is headed in the right direction, but is still sitting on top of a massive US$65 billion debt mountain, compared to just US$24 billion at the end of 2014.

“We have been able to pay down our debt quite a bit” after a very good year, Van Beurden said in a Bloomberg Television interview. “I’m very, very confident that we can indeed meet the commitments, the promises that we made, for the end of the decade, which is to have US$25 to US$30 billion free cashflow.”

Van Beurden has said he wants to make Shell the best-performing oil major, surpassing Exxon Mobil Corp. The Dutch company is the closest it’s ever been to attaining the long-coveted prize of overtaking its American rival, at least based on market value.

Shell’s 2017 profit was US$16.18 billion, more than double the previous year. Exxon Mobil is expected to report annual earnings of US$15.7 billion today. That makes 2017 a “transformative year” for Shell, van Beurden said.

Exploration and production earnings of US$1.65 billion beat analyst estimates provided by Shell. Refining and marketing profit of US$1.4 billion was down both quarter-on-quarter and year-on-year, falling short of expectations. Shell blamed the drop partly on “lower contributions from trading”.

Cashflow from operations was US$7.28 billion, compared to US$7.58 billion the preceding quarter and US$9.17 billion a year ago. Fourth-quarter oil and gas output was 3.76 million barrels of oil equivalent a day, compared to 3.91 million year earlier. Gearing at the end of 2017 was 24.8%, compared to 28% a year earlier. — Bloomberg