Shell starts long-awaited buybacks even as profit misses

By BLOOMBERG

LONDON • Royal Dutch Shell plc finally gave investors the share buybacks they’ve been demanding, even as profit fell short of expectations despite resurgent crude prices.

The Anglo-Dutch energy producer said yesterday that it is starting a US$25 billion (RM101.5 billion) share-repurchase programme, initially buying up US$2 billion of stock over three months.

That should soothe investors who have grown increasingly anxious about when they’ll see the reward for sticking with Shell through the biggest oil-industry downturn in a generation.

It wasn’t all good news, as adjusted net income for the second quarter (2Q) of US$4.69 billion fell short of even the lowest analyst estimate.

Its peers Equinor ASA and Total SA nearly matched or exceeded profit expectations.

Shell’s management resisted starting buybacks in the 1Q, saying its priority was paying down debt that ballooned after the more than US$50 billion acquisition of BG Group plc in 2016.

Since then, crude has risen to a three-year high, cashf low has surged and the company has made further progress in paying down its borrowings.

“Cashflow is what’s critical here,” said Oswald Clint, an analyst at Sanford C Bernstein Ltd. “It’s just confirming the strength of the integrated Shell-BG business.”

Cashflow for the quarter reached US$11.6 billion, excluding working capital movements, the highest since 2014 when crude averaged over US$100 a barrel, Shell CEO Ben van Beurden said in a Bloomberg Television interview.

Still, shares fell immediately after the market open and continued to decline as Van Beurden and CFO Jessica Uhl explained in a call with reporters that much of the earnings miss was largely due to one-time issues.

These issues included the rapid strengthening of the US dollar against the Brazilian real in the quarter.

Uhl also blamed the opacity of the trading business for the difference between estimates and income.

“We had overall a very good quarter. That being said, there were different expectations on the earnings side,” said Uhl.

Currency moves “had a real impact that can be difficult to anticipate and model”.

On another note, additional questions arose about the structure of the buyback programme.

Though it will vary quarter by quarter, according to Uhl, some thought it would have a stronger start.

Christyan Malek, an analyst at JPMorgan Chase & Co, estimated the company would complete US$8 billion of buybacks in the second half of 2018.

That would require Shell to repurchase US$6 billion of shares between October and December, triple the current pace.

Shell B shares in London fell 3% to 2,644 pence at 10:28am in London yesterday.

Equinor dropped 1.4% in Oslo, while Total rose 1.6% in Paris.

Now the question of buybacks has been answered, investors will also be keenly watching for any indication from management about how Shell will spend surplus cash.

After years of selling assets, the company has signalled a desire to return to growth mode.

A rush of activity in northwestern Canada has increased speculation Shell could give the go-ahead for a US$30 billion liquefied natural gas project this year.

The company is also said to have bid, with a partner, for BHP Billiton Ltd’s US onshore oil and gas business, which could be worth about US$9 billion.

Shell’s total oil and gas production from the upstream division fell 7% in the 2Q, compared to a year earlier, to 2.488 million barrels of oil equivalent a day, mainly due to asset sales.

The company predicted a further reduction in output this quarter, partly as a result of higher maintenance.