Shell’s (RDS.A) Q4 Earnings Jump After Oil Prices Recover

Europe’s largest oil company Royal Dutch Shell plc RDS.A reported strong fourth-quarter results on all round contribution from all its segments. In particular, rebounding commodity prices and cost cuts helped the company 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 $1.04, going past the Zacks Consensus Estimate of $1.02 and the year-ago adjusted profit of 44 cents. The profit growth further confirms the industry's resurgence from the deep oil slump.

Revenues of $88,124 million were 31.3% above the fourth-quarter 2016 sales of $67,092 million. Meanwhile, operating expenses edged down in the quarter, coming in at $9,776 million, compared to $9,895 million in the corresponding period last year.

Segmental Performance

Upstream: Upstream segment recorded a profit of $1,650 million (excluding items) during the quarter, soaring from the paltry $5 million (adjusted) achieved in the year-ago period.

This primarily reflects the impact of higher oil and gas realizations. Shell’s worldwide realized liquids prices were 24% above the year-earlier levels while natural gas prices were up 9%.

However, asset sales – specifically in Canada, UK North Sea and Gabon – reduced its oil and gas production. Shell’s upstream volumes averaged 2,775 thousand oil-equivalent barrels per day (MBOE/d), 7% lower than the year-ago period. Liquids contributed approximately 56% to Shell’s total volumes, while natural gas accounted for the remaining portion.

Downstream: In the downstream segment – that focuses on refining, marketing and retailing – the Anglo-Dutch super-major reported adjusted income of $1,396 million, 4.3% more than the $1,339 million earned in the year-ago period. The positive comparison reflects the impact of improved refining environment and higher marketing contributions, partly offset by increase in operating expenses.

Integrated Gas: The Integrated Gas unit reported adjusted income of $1,636 million, an 80.4% improvement from the $907 million in October-December quarter of 2016. Results were favorably impacted by increase in commodity prices, higher LNG production, as well as fall in taxation and depreciation.

Cash Flow

During the quarter under review, Shell generated cash flow from operations of $7,275 million, returned $3,900 million to shareholders through dividends and spent $6,778 million on capital projects. Despite falling from the year-ago period, the company’s resilient cash generation has helped it to cover dividend payments.

Shell has already aborted its two-and-a half-year long scrip dividend program as cost-containment efforts and divestment strategies have paid off. Importantly, the group raked in $6,610 million in free cash flow during the fourth quarter, up from $5,741 million a year ago.

Balance Sheet

As of Dec 31, 2017, the company had $20,312 million in cash and $85,665 million in debt (including short-term debt). Net debt-to-capitalization ratio was approximately 24.8%, down from 28% a year ago following the BG Group acquisition. The improvement in the group’s debt ratio was helped by cost cuts and asset sales.

Zacks Rank & Stock Picks

Royal Dutch Shell, which recently announced a new discovery in the deepwater Gulf of Mexico with Chevron CVX, holds a Zacks Rank #1 (Strong Buy).

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

Statoil is a major international integrated energy company with operations in all major hydrocarbon-producing regions of the world and an upstream focus on the Norwegian Continental Shelf. The Stavanger, Norway-headquartered company’s expected EPS growth rate for three to five years currently stands at 21%, comparing favorably with the industry's growth rate of 9.6%.

London-based BP is one of the largest publicly traded oil and gas companies in the world. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses. It has a 75% track of outperforming estimates over the last four quarters at an average rate of 26.8%.

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