Shell makes investors wait for reward from surging oil prices

LONDON • Royal Dutch Shell plc rode the surge in oil prices to even greater heights, posting a profit not seen since the days of US$100 (RM391.35) a barrel. Investors were displeased that the company didn’t take them along for the ride.

While French rival Total SA has started disbursing the rewards of rising energy prices — with higher dividends and share buybacks — Shell has other priorities, at least for now. CFO Jessica Uhl declined to say when her planned US$25 billion to US$30 billion stock-repurchase programme would start, telling reporters on a call that she wanted to focus on debt reduction first.

There are two big reasons for the company’s caution. First, it still has to pay off the acquisition of BG Group plc in 2016, a deal that’s turbo charged natural gas earnings, but left Shell heavily indebted. Second, its cashflow — little changed from a year earlier despite higher oil prices — “may not necessarily support” the planned buybacks, according to RBC Capital Markets.

Earnings at Europe’s largest energy company vaulted ahead of the upswing in crude to an average of US$67 in the first quarter (1Q), reaping the benefits of years of cost cuts. Adjusted net income was US$5.32 billion last quarter, compared to US$3.75 billion a year earlier. That surpassed analysts expectations of US$5.2 billion, rising to a level only consistently seen when oil traded for more than US$100.

Total and Statoil ASA also posted the best earnings in years this week, with Total pumping a record amount of oil and gas in the 1Q. Shares of the French firm rose in response to its results, the opposite of the reaction to Shell.

Shell dropped as much as 2.8% as analysts raised concerns about flat cashflow from operations, which was US$9.43 billion in the first three months of 2018.

“The only negative here is the conversion of those earnings into cashflow,” Oswald Clint, an analyst at Bernstein Research, said by telephone. “It’s a little bit lighter than what I was expecting.”

Shell’s free cashflow was sufficient to fund the company’s cash dividends and interest payments in the 1Q, which wasn’t always the case during the oil-price slump. Like its peers, Shell was forced to make some payments to investors in shares during the downturn, known as a scrip dividend, while also borrowing to fund the cash portion of the payout.

Those newly created shares diluted the holdings of some investors, who have maintained a sharp focus on the timing of the buybacks required to offset the impact. Shell wasn’t able to offer a clear answer on what could trigger the repurchases.

“It’s an integrated decision. I’ve provided enough insight,” CFO Uhl told reporters in response to several questions about buybacks.

That situation should change. Barclays analysts said in a note that they expect Shell to begin the programme in the second half.

“We would expect cashflow growth through the year supported by the current macro environment,” said Biraj Borkhataria, an analyst at RBC Capital Markets. “Royal Dutch Shell remains one of our preferred super-majors.” — Bloomberg