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The oil-price rally proved a double-edged sword for Royal Dutch Shell Plc, as improved exploration and production lifted profit to a three-year high while refining and trading fell short of expectations.
Crude’s surge raised adjusted profit at Europe’s largest energy company to $4.3 billion last quarter, the highest since 2014. While the bottom line was better than expected — and Shell is making as much money with oil at $60 a barrel as when it was $100 — cash flow was the weakest since 2016.
“Unfortunately, resilient earnings do not appear to have translated into cash generation,” RBC Capital Markets analyst Biraj Borkhataria said in a note. “This result leaves gearing falling by less than we expected” and could temper hopes of a share buyback program in the very near term, he said.
Shell’s B shares fell as much as 4 percent, the most since May, and were 2.2 percent lower at 2,442 pence at 8:03 a.m. in London.
Oil majors including Shell have cleaned up their balance sheets to survive the worst industry downturn in a generation, eliminating expensive projects and laying off staff to cut capital expenditure. After those efforts and a recovery in oil prices, some analysts predict a bright 2017. Goldman Sachs Group Inc.’s Michele Della Vigna said it could be Big Oil’s best year in decades, so long as companies maintain discipline.
Higher earnings and cash flow in 2017 are helping Chief Executive Officer Ben Van Beurden cut debt, which rose to a record of almost $78 billion following the acquisition of BG Group Plc. He can claim the company is headed in the right direction, but is still sitting on top of a massive $65 billion debt mountain, compared with just $24 billion at the end of 2014.
“We have been able to pay down our debt quite a bit” after a very good year, Van Beurden said in a Bloomberg Television interview. “I’m very, very confident that we can indeed meet the commitments, the promises that we made, for the end of the decade, which is to have $25 to $30 billion free cash flow.”
Van Beurden has said he wants to make Shell the best-performing oil major, surpassing Exxon Mobil Corp. The Dutch company is the closest it’s ever been to attaining the long-coveted prize of overtaking its American rival, at least based on market value.
Shell’s 2017 profit was $16.18 billion, more than double the previous year. Exxon Mobil is expected to report annual earnings of $15.7 billion on Friday. That makes 2017 a “transformative year” for Shell, van Beurden said.
- Exploration and production earnings of $1.65 billion beat analyst estimates provided by Shell.
- Refining and marketing profit of $1.4 billion was down both quarter-on-quarter and year-on-year, falling short of expectations. Shell blamed the drop partly on “lower contributions from trading.”
- Cash flow from operations was $7.28 billion, compared with $7.58 billion the preceding quarter and $9.17 billion a year ago.
- Fourth-quarter oil and gas output was 3.76 million barrels of oil equivalent a day, compared with 3.91 million year earlier.
- Gearing at the end of 2017 was 24.8 percent, compared with 28 percent a year earlier.
— With assistance by Javier Blas
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