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Shell (RDS.A) Rides on Gas Unit to Q1 Earnings Outperformance

Nilanjan Choudhury

Europe’s largest oil company Royal Dutch Shell plc RDS.A reported earnings per ADS (on a current cost of supplies basis, excluding items - the market’s preferred measure) of $1.30, above the Zacks Consensus Estimate of $1.05 and in line with the year-ago profit. The better-than-expected bottom line could be attributed to strength in its gas business, partly offset by weaker refining margins.

The Hague-based Shell reported revenues of $85.7 billion, which beat the Zacks Consensus Estimate of $83 billion but were 6% below the first-quarter 2018 sales of $91.1 billion due to lower oil prices.

Meanwhile, Shell will repurchase $2.75 billion worth of shares up to Jul 29 in the fourth installment of its three-year $25 billion buyback program.

Royal Dutch Shell PLC Price, Consensus and EPS Surprise


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

Segment Performance

Upstream: Upstream segment recorded a profit of $1.7 billion (excluding items) during the quarter, up 11% from the $1.6 billion (adjusted) achieved in the year-ago period. This primarily reflects the impact of lower operating expenses and higher production, with notable contribution from the U.S. Gulf of Mexico and the shale plays.

Meanwhile, at $57.42 per barrel, the group’s worldwide realized liquids prices were 5% below the year-earlier levels while natural gas prices were up 8%.

Shell’s upstream volumes averaged 2,901 thousand oil-equivalent barrels per day (MBOE/d), 1% higher than the year-ago period. Liquids contributed approximately 59% to Shell’s total volumes, while natural gas accounted for the remaining portion. Asset sales, normal field decline and lower output from the NAM joint venture – a 50-50 initiative between Shell and ExxonMobil XOM – reduced the company’s oil and gas production to some extent but it was more than offset by the inclusion of the Salym joint venture (with Gazprom) and ramp-ups of existing North American operations.

Downstream: In the downstream segment – that focuses on refining, marketing and retailing – the Anglo-Dutch super-major reported adjusted income of $1.8 billion, 3% more than the year-ago period. The slightly positive comparison reflects the impact of higher oil trading contributions, partially offset by weaker refining margins.

Integrated Gas: The Integrated Gas unit reported adjusted income of $2.6 billion, up 5% from the $2.4 billion in January-March quarter of 2018. Results were favorably impacted by increase in realized LNG and gas prices and portfolio optimization gains.

Financial Performance

As of Mar 31, 2019, the Zacks Rank #3 (Hold) company had $21.5 billion in cash and $92.5 billion in debt (including short-term debt). Net debt-to-capitalization ratio was approximately 26.5%, up from 24.7% a year ago. The deterioration in the group’s debt ratio was due to the adoption of IFRS 16 accounting standard.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

During the quarter under review, Shell generated cash flow from operations of $8.6 billion, returned $3.9 billion to shareholders through dividends and spent $6.7 billion on capital projects.

The company’s cash flow from operations fell 9% from the year-earlier level. Therefore, the group raked in $4 billion in free cash flow during the first quarter, down from $5.2 billion a year ago. Moreover, it was not sufficient enough to take care of its $2.5 billion in share buybacks and its $3.9 billion dividend.

Second-Quarter Outlook

Shell, which delivered on its $30 billion divestment target for 2016-2018, expects second quarter 2019 upstream volumes to be 150,000-200,000 BOE/D higher year over year, mainly due to new field ramp-ups and lower maintenance activities. The company further add that production at its ‘Integrated Gas’ segment will likely fall by some 10,000-50,000 BOE/D, mainly attributable to asset sales and the transfer of certain operations into the ‘Upstream ‘ unit.

Earnings of Other Oil Supermajors

Among the major integrated players, BP plc BP and Chevron CVX reported better-than-expected first-quarter earnings but ExxonMobil came up with weak results.

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