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Shell's (RDS.A) Q3 Earnings Beat Amid Higher Oil, Cost Cuts

Nilanjan Choudhury

Europe’s largest oil company Royal Dutch Shell plc RDS.A reported strong third-quarter results on all round contribution from all its segments. In particular, rebounding commodity prices and cost cuts helped the company follow continental rival BP plc BP in coming out with better-than-expected numbers.

The Hague-based Shell reported earnings per ADS (on a current cost of supplies basis, excluding items - the market’s preferred measure) of $1.00, breezing past the Zacks Consensus Estimate of 83 cents and the year-ago adjusted profit of 70 cents.

Revenues of $77,733 million were 23.5% above the third-quarter 2016 sales of $62,938 million. Meanwhile, operating expenses fell in the quarter to $9,477 million compared with $9,994 million in the corresponding period last year.

Royal Dutch Shell PLC Price, Consensus and EPS Surprise


Royal Dutch Shell PLC Price, Consensus and EPS Surprise | Royal Dutch Shell PLC Quote



Segmental Performance

Upstream: Upstream segment recorded a profit of $562 million (excluding items) during the quarter, soaring from the paltry $4 million (adjusted) achieved in the year-ago period.

This primarily reflects the impact of higher oil and gas realizations, revised assessment of a deferred tax asset and an arrears settlement agreement, partly offset by increase in depreciation charges.

Shell’s upstream volumes averaged 2,656 thousand oil-equivalent barrels per day (MBOE/d), 1% lower than the year-ago period. Liquids contributed approximately 61% to Shell’s total volumes, while natural gas accounted for the remaining portion.

Apart from the obvious BG role, production during the quarter compared with the year-ago quarter included volumes from new field start-ups and continued ramp-up of existing fields – particularly Kashagan in Kazakhstan, the Lula, Iracema and Sapinhoá fields in Brazil and Stones, Olympus and Mars in the Gulf of Mexico – that boosted output by roughly 243 MBOE/d. However, this was more than offset by the impact of normal field declines and asset sales.

Shell’s worldwide realized liquids prices were 16.4% above the year-earlier levels while natural gas prices were up 21.3%.

Downstream: In the downstream segment – that focuses on refining, marketing and retailing – the Anglo-Dutch super-major reported adjusted income of $2,668 million, 28.4% more than the $2,078 million earned in the year-ago period. The positive comparison reflects the impact of ‘improved refining and chemicals industry conditions’.

Integrated Gas: The Integrated Gas unit reported adjusted income of $1,282 million, a 37.7% improvement from the $931 million in July-September quarter of 2016. Results were favorably impacted by increase in commodity prices and higher LNG volumes (production and liquefication). Partly offsetting these factors were revised assessment of a deferred tax liability and higher depreciation.

Cash Flow

During the quarter under review, Shell generated cash flow from operations of $7,582 million, returned $4,000 million to shareholders through dividends and spent $5,742 million on capital projects. Despite falling from the year-ago period, the company’s resilient cash generation has helped it to cover dividend payments. Importantly, the group raked in $3,670 million in free cash flow during the third quarter, up from $3,324 million a year ago.

Balance Sheet

As of Sep 30, 2017, the company had $20,699 million in cash and $88,356 million in debt (including short-term debt). Net debt-to-capitalization ratio was approximately 25.4%, down from 29.2% a year ago following the BG Group acquisition. The improvement in the group’s debt ratio was helped by cost cuts and asset sales (worth more than $26 billion since 2016).

Share Performance: Royal Dutch Shell has gained 15.5% of its value during the third quarter, outperforming the 10.8% rally of the industry it belongs to.

Zacks Rank & Stock Picks

Royal Dutch holds a Zacks Rank #2 (Buy).

Apart from Shell, one can look at other buy-ranked integrated energy players like ExxonMobil Corporation XOM and Chevron Corporation CVX ExxonMobil sports a Zacks Rank #1 (Strong Buy), while Chevron holds Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Irving, TX-based ExxonMobil is the world’s largest publicly traded oil company, engaged in oil and natural gas exploration and production, petroleum products refining and marketing, chemicals manufacture, and other energy-related businesses. company’s expected EPS growth rate for three to five years currently stands at 13.1%, comparing favorably with the industry's growth rate of 8.4%.

San Ramon, CA-based Chevron is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses. Over 30 days, the firm has seen the Zacks Consensus Estimate for 2017 and 2018 increase 4.2% and 8.1%, to $4.21 and $4.96 per share, respectively.

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