Shell’s 1Q earnings top estimates as natural gas leads the way

LONDON • Royal Dutch Shell plc’s first-quarter (1Q) earnings beat even the highest analyst estimate as its natural gas business led a strong company-wide performance. Shares rose.

Shell gives a positive ending to a mixed Big Oil earnings season, which showed companies mostly recovering from a worst-in-a-generation downturn, but unable to fully insulate themselves against volatile markets.

While BP plc, Chevron Corp and Total SA mostly matched earnings estimates on a mixture of rising output and cost cuts, Exxon Mobil Corp suffered a “shocker” due to its worst refining performance in nearly 20 years.

“Shell has made a strong start to 2019,” CEO Ben Van Beurden said in a statement yesterday. “The consistent financial performance across all our businesses provides confidence in meeting our 2020 outlook.”

Shell B shares rose 2.3% to 2,484 pence (RM134.14) at 11:36am in London yesterday, making it the third-best performer on the FTSE 100 Index.

The Anglo-Dutch company said adjusted net income was US$5.3 billion (RM21.94 billion) in the 1Q, well ahead of the average analyst estimate of

US$4.52 billion. That’s 2% down from a year earlier, reflecting weaker refining margins and lower crude prices.

Shell is far more focused on natural gas than its peers, accounting for about 25% of all the world’s traded liquefied natural gas (LNG) volumes annually, and its earnings showed the benefit of that position. Profit of US$2.57 billion from Integrated Gas was 24% higher than analysts’ estimates, the largest outperformance of any unit.

The gas segment benefitted from a rise in oil prices late last year. Most of Shell’s LNG contracts are bilateral deals linked to the price of crude, with about a three-month lag, CFO Jessica Uhl said in a call with reporters. That dynamic may also affect earnings in the 2Q, which will reflect crude’s slump at the end of 2018.

But “there’s a mix of things, so I wouldn’t want to overplay that”, she said.

Cashflow from operations, excluding working capital movements and the effect of accounting-rule changes, rose to US$11.3 billion from US$10.4 billion a year earlier. By 2020, Shell aims to deliver US$25 billion to US$30 billion of free cashflow annually, assuming an oil price of US$60 a barrel.

“Overall, we see this as a strong set of numbers confirming Shell is getting closer to reaching its 2020 free cashflow targets,” RBC Capital Markets analyst Biraj Borkhataria said in a note.

Shell’s net cash position shrank by more than US$5 billion as it paid dividends and bought back shares. The company’s gearing — the ratio of net debt to total capital — jumped to 26.5% from 20.3% at the end of 2018, although a large part of that increase was the result of changes to international accounting rules. Under the previous system, gearing would have been 21.9% at the end of the quarter.

Total oil and gas (O&G) output decreased 2% to 3.752 million barrels of oil equivalent a day. In the quarter, Shell started up a production vessel offshore Brazil called Lula North and shipped some of its first cargoes of a light oil called condensate from the Prelude LNG project in Australia.

Investors are keeping a close eye on share buybacks. The company has repurchased US$6.75 billion of shares so far, and will acquire a maximum of US$2.75 billion in addition by July 29. It intends to buy back US$25 billion of stock in total before 2021.

The size of Shell’s buybacks gives the company less flexibility than its peers to make new investments, according to RBC. Its shares so far this year have performed worse than the Stoxx 600 O&G Index and rival BP, which spent big to acquire a strong position in US shale. — Bloomberg