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Royal Dutch Shell Plc. 3Q18 profit soars

07 November 2018

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by David Gibb (Anchor BCI Worldwide Flexible Fund)

Royal Dutch Shell (Shell) released 3Q18 results on Thursday (1 November), with revenue standing at $100.15bn vs $75.83bn posted in 3Q17, while diluted EPS rose to $0.70 from $0.49 recorded in the corresponding period of 2017. Net income attributable to shareholders in 3Q18, based on a current cost of supplies (CCS) and excluding identified items, rose 39% YoY to $5.62bn, vs 2Q18’s $4.69bn but below a company-provided analysts’ consensus of $5.77bn. Nevertheless, this was its highest level in four years, boosted by stronger crude oil and gas prices, as well as bigger contributions from trading. It was offset by weaker refining margins, tax and currency exchange effects. Cash generation from operations rose an impressive c. 60% YoY to $12.1bn, as the cost savings over recent years filtered through. CEO Ben van Beurden described the results as “Good operational delivery across all Shell businesses …” and ” … producing one of our strongest-ever quarters, … ”

Shell also announced the commencement of trading in the second tranche of its share buyback programme of up to $2.5bn by 28 January 2019 (it completed the first tranche of buybacks in October [for $2bn]). The company’s intention is to buy back at least $25bn of its shares by the end of 2020, subject to further progress with debt reduction and oil price conditions. Debt levels (i.e. gearing) declined to 23.1% in 3Q18 from 23.6% at the end of June, on track to Shell’s target of 20%.

Oil and gas production in the quarter declined by 2% YoY to 3.596mn barrels of oil equivalent.

The company declared a dividend of $0.47/share.

Shell has been a very strong performer over the past two and a half years. With the Brent oil price having risen from $30/bbl to over $70/bbl since early 2016, we believe that Shell has entered a phase of enormous cash flow generation, which will support a large share buyback programme and a further reduction of debt levels following its acquisition of gas giant, BG Group, in early 2016. Being the largest liquefied natural gas (LNG) player globally, Shell is also sweetly positioned for the strong demand in this market as power generation shifts away from coal to gas in key markets like China. Despite the recent wobble in the oil price (declining from highs of around $86 per barrel to just above $70 per barrel), we have returned to an era of expensive oil, and this does not appear to be fully reflected in Shell’s current share price. Thus, we would expect further outperformance from the company.

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