By Ron Bousso
LONDON (Reuters) - Royal Dutch Shell reported on Thursday a 42 percent rise in first-quarter profit to its highest in more than three years on stronger oil prices and production, but its shares fell as the oil major's cash flow missed forecasts.
Expectations are high for Shell to continue generating strong profits and cash flow after the Anglo-Dutch company beat larger rival Exxon Mobil on both fronts in 2017 thanks to its cost cuts and higher efficiencies.
But Shell's shares slid 2.1 percent by 1025 GMT as cash flow fell short of forecasts, even though profits rose more sharply than expected to $5.3 billion. The broader European energy index was up 0.9 percent.
"The focus for the big oils in recent months has been the return to free cash flow, particularly given how strong Q1 normally is seasonally for the group," analysts at Barclays said in a note, which had said it expected a negative share reaction.
The world's top oil companies are expected to generate more cash in 2018 than at any other time this decade after three years of cuts, but boards remain cautious amid uncertainty over near-term and long-term prices.
(GRAPHIC: Shell and Total vs. Crude - https://reut.rs/2Khfk7Q)
Shell in the fourth quarter scrapped its scrip dividend in a sign of confidence it could maintain around $15 billion in annual dividend payments without resorting to borrowing after a three-year oil price downturn.
It plans to buy back $25 billion of shares by 2020 to offset the dilutive effect of the scrip and its $54 billion acquisition of BG Group.
Chief Financial Officer Jessica Uhl did not specify when Shell would begin the buybacks, telling reporters that the firm was "on track but not there yet" as it focuses first on reducing debt and paying dividends.
After missing expectations the previous quarter, Shell's cash flow from operations in the first three months of 2018 recovered to $9.43 billion but that was still slightly weaker than $9.5 billion a year earlier. Free cash flow was little changed at $5.178 billion.
Uhl said lower cash flow was due to higher hedging payments from rising oil prices and one-off tax payments.
Net income attributable to shareholders, based on a current cost of supplies (CCS) and excluding identified items, rose to $5.322 billion, topping a company-provided analysts' consensus of $5.277 billion. A year earlier, net income was $3.754 billion.
Oil and gas production grew by 2 percent to 3.839 million barrels of oil equivalent per day. Earnings for the segment almost tripled from a year earlier.
Income from the refining and marketing segment, known as downstream, weakened due to lower refining margins and plant availability.
Gearing, the ratio between debt and Shell's market capitalization was slightly lower from the end of 2018 at 24.7 percent by the end of March.
Brent oil prices have risen in recent months to $75 per barrel, their highest since late 2014. Prices averaged about $67 a barrel in the first quarter, up nearly 25 percent from a year earlier.
(GRAPHIC: Shell profits - https://reut.rs/2JuZdlF)
(Reporting by Ron Bousso; Editing by Jane Merriman and Edmund Blair)