Shell's Q3 earnings improve but outlook remains uncertain

Earnings, excluding exceptional items, rose 18% to $2.8bn compared to the same quarter last year, above the forecast consensus of $1.7bn.

This was due to increased production volumes mainly from February's acquisition of BG Group, lower operating expenses, and lower well write-offs, which was partly offset by the decline in oil, gas and liquefied natural gas prices.

Chief executive Ben van Beurden said that the company had delivered better results for the third quarter, reflecting operational and cost performance, but lower oil prices continued to be a challenge across the business, and the outlook remains uncertain.

Currently oil prices are below the $50 mark, with Brent crude at $48.93 a barrel and West Texas Intermediate around $46.94.

The company's current cost of supplies (CCS) earnings attributable to shareholders was $1.4bn compared with a loss of $6.1bn for the same quarter last year.

Cash flow from operating activities was $8.5bn, which included favourable working capital movements of $700m.

Gearing at the end of the third quarter climbed to 29.2%, compared to 12.7% last year, due to the BG acquisition.

Van Beurden said Shell's investment plans and portfolio are focused on reshaping the company "into a world-class investment case at all points in the oil-price cycle", through stronger returns and improved free cash flow per share, which the company is “making good progress towards”.

He said that the integration of BG “is now essentially done” and that it has been an “important catalyst for the significant and lasting changes” to the company.

Cost cutting led to underlying operational costs in 2016 running are at an annualised rate of $40bn, $9bn lower than Shell and BG costs in 2014, and are set to reduce further on a like-for-like basis.

Capital investment, including $3bn in non-cash items, is to be around $29bn, about $18bn below 2014 Shell and BG levels., while investment for 2017 is expected to be around $25bn.

The company is to reduce its debts by selling $30bn of assets by the end of 2018 from 16 material asset sales currently being worked on.

Projects started up in during the year are expected to add more than 250 thousand barrels of oil equivalent per day, while cash flow from the new projects started between 2014 and 2018 is expected to come to $10bn in 2018, at an average $60 oil price.

The company declared a third quarter dividend of $0.47 per share and $0.94 per American depositary share.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said the return to profit in the upstream division is symbolically important as the company heaves itself out of the well it found itself in after oil prices collapsed.

“Shell’s dividend is announced in dollars, so the collapse in sterling since Brexit has effectively boosted its value for sterling investors. Despite improving conditions and falling costs, Shell is currently paying almost a third of its dividend in shares, as demands on the group’s cash outstrip its ability to generate it. That’s a heavy burden for the company to shoulder.

“The company isn’t standing still on the issue though. Capex is expected to be 14% lower next year, while operating costs could fall further as synergies from the BG deal come through. Unless the oil price stages a miraculous recovery there’s a long way to go before Shell returns to rude health, nonetheless the group is making progress in climbing the oil pole."

Shares in Royal Dutch Shell rose 2.94% to 2,098.50p at 0921 GMT.