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Royal Dutch Shell Earnings Slashed By 25 Percent Year-Over-Year

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Weaker oil and chemicals markets led to a drastic year-over-year reduction in Royal Dutch Shell's (NYSE: RDS.A) earnings attributable to shareholders. Shell recorded $3.5 billion in earnings for the second quarter, down 25 percent from the prior year.

Cash flow from operating activities increased 16 percent to $11 billion, mainly on lower earnings, but was partially offset by lower outflows on commodity derivatives (i.e., as oil and gas prices slumped, Shell's hedges did their job).

"We have delivered good cash flow performance, despite earnings volatility, in a quarter that has seen challenging macroeconomic conditions in refining and chemicals as well as lower gas prices," said chief executive officer Ben van Beurden. "This quarter we achieved some key milestones, such as the start-up of Appomattox and the first LNG cargo from Prelude. These add to our competitive portfolio, which is expected to generate additional cash in the coming quarters."

Lower commodity prices were partially offset by higher production. Although Shell's realized prices for global liquids and global natural gas fell by 8 percent and 13 percent respectively on a year-over-year basis, total production available for sale grew by 4 percent. Shell also trimmed operating expenses by 1 percent.

Shell's Integrated Gas segment earnings fell 60 percent to $1.3 billion; Upstream earnings grew 42 percent to $1.5 billion; and Downstream earnings dropped 8 percent to $1 billion.

Natural gas prices have been under pressure from oversupply, partially driven by hydraulic fracturing in the Permian Basin, where the commodity is so cheap that excess natural gas is ‘flared' or burned. Liquefied natural gas (LNG) exports, though, have been a growth area, and Shell reported that during the second quarter the first shipment of LNG sailed from its Prelude Floating LNG facility off the coast of Australia.

In Upstream, or Shell's exploration and production division, Shell reported that the Appomattox offshore platform in the Gulf of Mexico started up ahead of schedule. Appomattox has an expected peak production of 175,000 barrels of oil equivalents per day. Upstream increased its total liquids production available for sale by 12 percent year-over-year to 1.68 million barrels/day, although that number fell sequentially from the prior quarter.

Downstream includes Shell's refinery business, commercial sales of chemicals and other distillates, and retail sales of gasoline, diesel and lubricants. Lower crude and chemicals prices squeezed Shell's refining margins, resulting in a loss of $20 million for Refining and Trading, down 117 percent from the prior year. Earnings on chemicals were down 76 percent to $132 million from $558 million the prior year.

Guidance for production was mostly flat from third quarter 2018 levels, except that Downstream production should increase by 50,000 to 100,000 barrels of oil equivalent per day.

Shares of Royal Dutch Shell closed on Thursday about 6.5 percent lower from Wednesday's close.

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