Shell (RDS.A) Q2 Earnings Miss as Commodity Prices Fall

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 86 cents, below the Zacks Consensus Estimate of $1.22 and the year-ago profit of $1.12. The worse-than-expected bottom line could be attributed to lower oil and gas prices.

The Hague-based Shell reported revenues of $91.8 billion, which were 7.5% below the second-quarter 2018 sales of $99.3 billion but marginally beat the Zacks Consensus Estimate of $91.6 billion on higher production.

Meanwhile, Shell will repurchase $2.75 billion worth of shares up to Oct 28 in the fifth installment of its three-year $25 billion buyback program.

Operational Performance

Upstream: Upstream segment recorded a profit of $1.3 billion (excluding items) during the quarter, down 8.4% from the $1.5 billion (adjusted) achieved in the year-ago period. This primarily reflects the impact of lower oil and gas prices, plus higher depreciation associated with field ramp-ups, partly offset by increase in production and lower tax outgo.

Shell’s upstream volumes averaged 2,656 thousand oil-equivalent barrels per day (MBOE/d), 6.8% higher than the year-ago period. Liquids contributed approximately 63% to Shell’s total volumes, while natural gas accounted for the remaining portion. The inclusion of Salym joint venture (with Gazprom) and ramp-ups of existing North American operations contributed to increase in the company’s oil and gas production, which was partly offset by normal field decline and asset sales.

Downstream: In the downstream segment – that focuses on refining, marketing and retailing – the Anglo-Dutch super-major reported adjusted income of $1.3 billion, 19.4% less than the $1.7 billion earned in the year-ago period. The negative comparison was due to weaker chemicals, intermediates and refining margins.

Integrated Gas: The Integrated Gas unit reported adjusted income of $1.7 billion, down 25.1% from the $2.3 billion in April-May quarter of 2018. Results were primarily impacted by lower realized commodity prices and declining output.

Financial Performance

As of Jun 30, 2019, the Zacks Rank #3 (Hold) company had $18.5 billion in cash and $92.6 billion in debt (including short-term debt). Net debt-to-capitalization ratio was approximately 27.6%, up from 23.6% a year ago. The deterioration in the group’s debt ratio was due to the adoption of IFRS 16 accounting standard.

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During the quarter under review, Shell generated cash flow from operations of $11 billion, returned $3.8 billion to shareholders through dividends and spent $6.3 billion on capital projects.

The company’s cash flow from operations rose 16.1% from the year-earlier level. Meanwhile, the group raked in $6.9 billion in free cash flow during the second quarter, down from $9.5 billion a year ago. However, it was sufficient enough to take care of its $2.75 billion in share buybacks and its $3.8 billion dividend.

Third Quarter Outlook

Shell, which delivered on its $30 billion divestment target for 2016-2018, expects third quarter 2019 upstream volumes to be 50-100 thousand BOE/D higher year over year, mainly due to field ramp-ups and inclusion of its Salym asset. The company further add that production at its ‘Integrated Gas’ segment will likely remain essentially flat compared to the corresponding period of the previous year.

Earnings Schedules of Other Oil Supermajors

Among the major integrated players, ExxonMobil XOM and Chevron CVX are scheduled to release tomorrow, while continental rival BP plc BP reported better-than-expected second-quarter earnings earlier this week.

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