Shell smashes estimates as BG acquisition drives up output

By Rakteem Katakey on 11/1/2016

THE HAGUE (Bloomberg) -- Royal Dutch Shell reported third-quarter profit that beat analyst estimates after its acquisition of BG Group boosted oil production, helping to counter a slump in prices. The shares rose.

Profit adjusted for one-time items and inventory changes advanced 17% from a year earlier to $2.79 billion, The Hague-based Shell said Tuesday. That exceeded the $1.79-billion average estimate of 14 analysts surveyed by Bloomberg, and the earnings of U.S. giant Exxon Mobil Corp.

CEO Ben Van Beurden, who completed Shell’s record purchase of BG in February, has vowed to boost savings from the acquisition and use higher cash flows to safeguard the dividend following a two-year slump in crude. While the purchase increased Shell’s production from Australia to Latin America, it also forced the company to take on billions of dollars of debt and limit spending.

Shell expects capital investment to be about $25 billion in 2017, at the bottom of its $25 billion to $30 billion guidance and lower than this year’s $29 billion. The company generated $8.5 billion of cash from operations in the third quarter and sold $200 million of assets.

“The beat is showing the accretive nature of the BG portfolio and the low-cost barrels Shell has got,” said Oswald Clint, a London-based analyst at Sanford C. Bernstein & Co. “Cash flow was also well above expectations, and the market will be looking at that. They could balance their books at $50 oil next year.”

Benchmark Brent crude averaged $46.99/bbl in the quarter, down from $51.30 a year earlier. It’s now trading around $49.

Divisional Results

Profit from E&P totaled $4 million in the quarter, compared with a year-earlier loss. The downstream result declined 21% to $2.08 billion. Both divisions beat analyst estimates provided by the company.

Shell’s B shares, the most widely traded, jumped as much as 3.9% in London trading, and were up 3.7% at 2,192.5 pence as of 8:11 a.m. local time. The stock has increased 42% this year.

“Shell delivered better results this quarter, reflecting strong operational and cost performance,” Van Beurden said in a statement. Earnings “benefited from increased production volumes mainly from BG assets, lower operating expenses more than offsetting the increase related to the consolidation of BG, and lower well write-offs.”

Oil and gas production totaled 3.6 MMboed, an increase of 25% from a year earlier.

BP Earnings

UK competitor BP reported a 49% decline in third-quarter earnings to $933 million on Tuesday after crude prices fell and refining margins shrank. Although the company also beat analyst estimates, its shares fell 1.2% to 477.9 pence in London.

The oil collapse that began in mid-2014 has compelled explorers to delay projects, cancel billions of dollars of investments and cut jobs. While crude has increased more than 30% this year, low prices continue to be a “significant challenge,” Van Beurden said.

The CEO has renegotiated contracts, eliminated more than 12,000 positions and started a $30-billion asset-sale program to weather crude’s collapse. The company is preparing for a “lower forever” oil-price environment, Head of Upstream Operations Andy Brown said last month.

Capital expenditure was $7.7 billion in the third quarter. The company paid $3.8 billion in dividends, of which the equivalent of $1.1 billion was given to stockholders in shares.

Exxon, Chevron

Exxon Mobil Corp., the world’s biggest oil company by market value, said Oct. 28 its production sank to a seven-year low and extended a run of profit declines. Chevron Corp. posted its first profit in a year though production fell short of expectations. While cost cuts helped Total SA beat estimates, Eni SpA reported wider-than-expected losses and Statoil posted a surprise loss.

Shell completed the acquisition of BG for $54 billion on Feb. 15. The purchase gave it a 20% share of the global LNG market as well as high-margin oil fields in Brazil.

The company and its European competitors have cut the cost of operations through the downturn while increasing borrowings to maintain dividends. Shell’s acquisition of BG forced it to borrow even more. Shell’s net debt to capital, also called gearing, was at 29.2% at the end of the third quarter, compared with 12.7% a year earlier.

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