Boosted by robust oil and natural gas prices, Royal Dutch Shell plc's latest quarterly earnings hit their highest level in years, but cash flow in the final three months of 2017 slumped.
While the company's profit attributable to shareholders, excluding special items, was 140% higher on the quarter at $4.3 billion in the final quarter of 2017, Shell's cash flow from operations during the fourth quarter of 2017 was down 21% on the three-month period to about $7.3 billion. This was due to higher tax payments and increased cash requirements in its trading business, the company said.
However, for the full year 2017, the Anglo-Dutch major's cash flow totaled $36 billion, as Brent crude oil prices averaged $54.00 per barrel for the year, Shell CEO Ben van Beurden said during a Feb. 1 earnings call.
Overall, Shell has continued to generate strong cash flow even in the face of crude oil prices that are rebounding, but that are still below levels seen several years ago.
"Our cash flow from operations at $54 per barrel is in line with the cash flow from operations we achieved when oil was at $99 per barrel. In 2017, our organic free cash flow achieved levels in line with our declared dividend. This demonstrates the quality of our portfolio, the strength of our underlying performance and our resilience through the cycle," CFO Jessica Uhl said during the Feb. 1 earnings call.
"We are confident that we can continue to grow our organic free cash flow in the years to come, with revenues from new projects coming on stream and further operational cost efficiencies to be realized. ... We expect to generate organic free cash flow some $25 billion to $30 billion around the end of the decade at $60 per barrel, real terms 2016," she said. "We have close to $10 billion in cash flow from operations still to be delivered in the 2018 to 2020 time frame, growth across our portfolio and continued cash delivery from operational improvements."
Improved results for the Anglo-Dutch major's exploration and production segment of $1.65 billion were offset by lower-than-expected earnings from the company's refining and marketing unit of $1.4 billion, which declined from the same quarter in 2017.
Shell took an anticipated $2.0 billion hit related to recent tax reform in the U.S., which requires revaluation of deferred tax assets and liabilities to reflect the lower rate of 21%, down from 35%.
While a recovery in oil prices and a disciplined approach to capital investment has helped the company, as well as many of its peers, strengthen their financial positions in the last year, a key part of Shell's strategy to reduce debt and generate cash flow lies in its planned divestitures. With $24 billion of divestments completed so far, the company remains on track to sell-off assets worth a total of $30 billion over a two-year period from 2016 to 2018.
"As expected, divestment proceeds have supported debt reduction. At a headline level, we have now completed around $24 billion of divestments since the beginning of 2016. We've announced a further $3 billion of divestments, and we can confirm that more than $3 billion worth of additional divestments are well advanced," Uhl said.
Further evidence of the turning tides following several years of sagging oil prices, at the end of 2017, Shell announced the end of its scrip program and a restart of its share buyback program. In 2015, as the company moved to acquire BG Group Plc through a combination of cash and stock, Shell introduced a scrip dividend, allowing shareholders the option to be paid in either shares or cash.
Shell's capital expenditures for the fourth quarter totaled more than $6 billion, up from more than $5 billion in the third quarter of 2017.
In terms of growth, Shell is looking to build out its chemical and deepwater businesses, Uhl said. On Jan. 31, Shell said it has made one of its largest discoveries in the last 10 years from the Whale deepwater well in the Gulf of Mexico. Appraisal of the Ehale well, which complements Shell's existing interests in the Perdido area, is underway to determine the size of the well.
Additionally, as oil prices continue their recovery, Shell, alone and in various partnerships, won nine exploration blocks in the Gulf of Mexico during a Jan. 31 auction held by Mexico.
"We believe the growth in the deep water, shales and chemicals businesses will lead to [cash flow from operations] in excess of $55 [billion] by 2020. This growth, combined with strong capital discipline, will lead to free cash flow in excess of $25 [billion], a 10% yield based on the current market cap," Jason Gammel, equity analyst at Jefferies, wrote in a Feb. 1 research note.
Shell's B shares, the most widely traded, closed 2.5% lower at 2,433 pence on the London Stock Exchange. Shell stock on the NYSE was valued at $69.29 per share at midday Feb. 1, down $1.03, or 1.46%, on the day.
