Shell's best profit in three years marred by cash-flow drop

By Kelly Gilblom on 2/1/2018

LONDON (Bloomberg) -- The oil-price rally worked both ways for Royal Dutch Shell as improved exploration and production lifted profit to a three-year high while refining and trading fell short of expectations as margins shrank.

Crude’s surge raised adjusted profit at Europe’s largest energy company to $4.3 billion last quarter, the highest since 2014. While the bottom line was better than expected -- and Shell is making as much money with oil at $60/bbl as when it was $100 -- cash flow was the weakest since 2016.

“Unfortunately, resilient earnings do not appear to have translated into cash generation,” RBC Capital Markets analyst Biraj Borkhataria said in a note. “This result leaves gearing falling by less than we expected” and could temper hopes of a share buyback program in the very near term, he said. Shell’s B shares fell as much as 4%, the most since May, and were 1.2% lower.

Oil majors including Shell have cleaned up their balance sheets to survive the worst industry downturn in a generation, eliminating expensive projects and laying off staff to cut capital expenditure. After those efforts and a recovery in oil prices, some analysts predict a bright 2017. Goldman Sachs Group’s Michele Della Vigna said it could be Big Oil’s best year in decades, so long as companies maintain discipline.

Higher earnings and cash flow in 2017 are helping CEO Ben Van Beurden cut debt, which rose to a record of almost $78 billion following the acquisition of BG Group. He can claim the company is headed in the right direction, but is still sitting on top of a massive $65 billion debt mountain, compared with just $24 billion at the end of 2014.

Refining Margins

“We have been able to pay down our debt quite a bit” after a very good year, Van Beurden said in a Bloomberg Television interview. “I’m very, very confident that we can indeed meet the commitments, the promises that we made, for the end of the decade, which is to have $25 to $30 billion free cash flow.”

Exploration and production earnings of $1.65 billion beat analyst estimates provided by Shell. Refining and marketing profit of $1.4 billion was down both quarter-on-quarter and year-on-year, falling short of expectations.

Lower margins at the end of December and a smaller contribution from trading were partly responsible for the refining unit’s declining earnings, Van Beurden told reporters in London. U.S. Gulf Coast margins dropped to an average $8.59/bbl in the fourth quarter, compared with $13.04 in the preceding three months, according to Shell’s documents. Rotterdam and Singapore showed similar proportional declines.

Van Beurden has said he wants to make Shell the best-performing oil major, surpassing Exxon Mobil. The Dutch company is the closest it’s ever been to attaining the long-coveted prize of overtaking its American rival, at least based on market value.

Shell’s 2017 profit was $16.18 billion, more than double the previous year. Exxon Mobil is expected to report annual earnings of $15.7 billion on Friday. That makes 2017 a “transformative year” for Shell, Van Beurden said.

Cash flow from operations was $7.28 billion, compared with $7.58 billion the preceding quarter and $9.17 billion a year ago. Fourth-quarter oil and gas output was 3.76 MMboed, compared with 3.91 MMboed a year earlier. Gearing at the end of 2017 was 24.8%, compared with 28% a year earlier.

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