Shell beats expectations as Q3 profits surge 197% to $4.1bn on refining

November 02, 2017 | Company Operations, Earnings Reports

London, UK | –  Royal Dutch Shell Plc reported a near 50% rise in quarterly profits, driven by strong refining, while solid cash generation underscored the oil and gas company has adapted well to a world of low oil prices.

The Anglo-Dutch company sharply boosted its cash generation in recent quarters as the effects of cost cuts and asset sales kicked in following CEO Ben van Beurden’s preparations for “longer forever” oil prices following the 2014 downturn.

“Shell’s three businesses all made resilient contributions to this strong set of results,” van Beurden said in a statement, referring to downstream operations, oil and gas.

Shell and most of its rivals are now able to generate profit even if oil prices return to about $50 a barrel (bbl) and are once again focusing on growing their businesses. Oil prices averaged $52/bbl in the quarter and are today above $60/bbl.

BP Plc said this week it was able to balance its books so far this year at $49/bbl.

In a sign of a renewed emphasis on growth, last week Shell won half the blocks awarded in Brazil’s deepwater oil auction, where rivals BP and ExxonMobil Corporation also acquired blocks in a historic opening to foreign operators.

Shell shares were little changed as of 4:20 a.m. CST (9:20 GMT).

Hurricane Impact

Shell’s third-quarter earnings rose mostly due to a tripling of profits from the refining segment which benefited from a sharp rise in profit margins in the wake of Hurricane Harvey in late August which knocked out a quarter of the U.S. refining capacity.

Shell’s chemicals segment, a key engine for its growth into the next decade, also saw profits rise by 20% from a year earlier.

“The numbers were strong. The downstream was the key driver again,” said Iain Reid, analyst at Macquarie.

Third-quarter net income attributable to shareholders, based on current cost of supplies and excluding exceptional items, was $4.1 billion. That compared with $2.8 billion a year earlier and a company-provided analysts’ consensus of $3.62 billion.

Oil and gas production in the quarter was up 2% at 3.657 million barrels of oil equivalent.

Cash flow from operations in the third quarter fell by 33% from the previous quarter to $7.58 billion for the first time since the first quarter of 2016. The drop in cash flow was due to increases in value of inventories as oil prices rose from a year ago, Shell said.

Excluding the capital build, cash flow was at $10 billion in the quarter, securing Shell’s spending as well as its dividend payments, analysts said.

“The company is demonstrating the resiliency of its operating cash flow in a roughly $50 a barrel Brent environment, the dividend is being covered with free cash flow,” said Jefferies analyst Jason Gammel.

Shell’s debt ratio vs. company capitalization, known as gearing, slightly rose to 25.4% from 25.3% the previous quarter.

That was still significantly lower than a peak of 29.2% reached in the third quarter of 2016 that followed the $54 billion acquisition of BG Group in February. Shell’s debt pile in the third quarter came to $68 billion.

Shell has sold or agreed to sell around $25 billion worth of assets to help pay for the BG deal, including large portfolios in the North Sea and Canada. It appears on track to hit its $30 billion target by the end of next year.