Shell pumps torrent of cash as BG takeover, cost cuts pay off

LONDON (Bloomberg) -- Royal Dutch Shell showed it has adapted to a world of lower oil prices, generating a surge in cash that allowed it to pay dividends while reducing debt.

The Anglo-Dutch company’s first-quarter performance helps validate CEO Ben Van Beurden’s $54 billion purchase of BG Group -- for which some shareholders complained he overpaid -- and the deep spending cuts and asset sales he undertook to protect the balance sheet.

“With new projects starting and higher-cost assets being sold, you’d expect cash generation to only increase,” said Iain Armstrong, an analyst at Brewin Dolphin Ltd., which owns Shell shares. “It’s becoming a cash-generating machine.”

Shell has adjusted its business to $50-a-barrel crude by cutting costs, increasing production and learning to live within its means. The company beat first-quarter profit estimates, as did its “supermajor” peers -- Exxon Mobil, Chevron, Total and BP -- all of which tightened their belts following oil’s collapse.

Shell’s cash flow from operations expanded more than 10-fold to $9.51 billion in the quarter, the company said Thursday in a statement. After taking out the cost of investments, free cash flow of $5.18 billion covered the cash portion of the dividend for a third consecutive quarter. The total dividend payout was $3.9 billion, of which $2.7 billion was paid in cash and the remainder as shares, the company said.

That’s a big change from the depths of the oil-price slump a year earlier, when Shell was borrowing money to cover shareholder payouts. Net debt fell for a second consecutive quarter to $72 billion. Gearing, or net debt to capital, narrowed to 27.2% from 28% at the end of last year.

The company aims to bring that down to 20% over time, CFO Jessica Uhl said. Profit adjusted for one-time items and inventory changes more than doubled to $3.75 billion from $1.55 billion a year earlier, surpassing the $3.01 billion average of analyst estimates.

Profit in Shell’s upstream, or exploration and production, business totaled $540 million in the quarter, compared with a loss a year earlier. The downstream division, which includes refining and marketing, posted income of $2.49 billion, an increase of 24%.

Norwegian peer Statoil also announced results Thursday, reporting a 10-fold jump in profit. Spain’s Repsol SA said earnings increased 10%. Statoil’s shares gained as much as 3.7%, while Shell’s B shares, the most widely traded, advanced as much as 3.6%. Repsol was down 0.4%.

Still, all the supermajors’ stocks have dropped since the start of the year as the rally in crude prices -- up 55% in the first quarter from a year earlier -- faltered. “The risk to the good show by the supermajors is oil prices falling below $50,” Brewin Dolphin’s Armstrong said.

Brent is trading around $50.34/bbl in London, down 11% this year as OPEC and its allies struggle to eliminate a global supply glut. Oil was about $60 when Shell announced its BG acquisition in April 2015. The company piled up borrowings following the deal and has set a $30 billion asset-sale target for the three years to 2018. It’s about two-thirds of the way there following divestments in Canada, Gabon and the UK North Sea. It’s also planning to sell fuel stations and a refinery in Argentina.