Royal Dutch Shell Plc is pumping out a torrent of cash, delivering the payoff that was promised to investors after the company’s biggest-ever acquisition three years ago.
Chief Executive Officer Ben van Beurden is close to achieving all the targets he set after buying BG Group Plc in 2016 — generating more cash at lower oil prices, delivering double-digit returns to shareholders and keeping spending under control. Shell’s cash flow in the last three months of 2018 was three times the typical quarterly level before the deal, while a measure of indebtedness fell to the lowest level since the $50 billion purchase.
The better-than-expected performance eased investors’ doubts about whether Shell can simultaneously afford to curb borrowings, complete share buybacks, pay one of the world’s largest cash dividends and invest in new fields.
Yet Chief Financial Officer Jessica Uhl’s pledge that the company can “do it all” with crude at $60 a barrel highlights the risk all oil companies face in a market characterized in recent months by extreme volatility. Brent crude, the international benchmark, is trading at $62 now, but fell below $50 barely a month ago.
Investors reacted positively to Thursday’s earnings report, sending the company’s shares as much as 4.7 percent higher, the biggest increase in eight weeks.
“Shell has delivered all of its primary targets in 2018,” Jason Gammel, an oil analyst at Jefferies LLC, said in a note. “Dividends and repurchases are delivering a more than 10 percent cash return yield to shareholders, by far the highest in the sector.”
Cash flow from operations, a crucial measure of the sustainability of spending, was $22 billion in the fourth quarter, three times the level a year earlier. That figure benefited from a $9.1 billion positive move in working capital, mainly due to the decline in crude prices and lower inventory levels.
Uhl said organic free cash flow for the whole of 2018 was $31 billion, surpassing its 2016 target to deliver $25 billion to $30 billion annually by 2020.
Adjusted net income of $5.69 billion beat analysts’ estimates and was the highest for the period in at least six years, matching an era when oil was closer to $100 a barrel. Van Beurden has made lowering costs a priority, first to survive crude’s collapse from 2014 to 2017, and then to keep the company competitive in case prices stay lower.
That focus on value over volume was very much present on Thursday.
“What we want is to grow our company. That may or may not correlate with reserves,” Uhl said in an interview on the sidelines of a company press conference. “We have confidence in our ability to continue to grow cash flow.”
Shell only replaced about half of the 1.4 billion barrels of reserves it produced in 2018, well below the average level. Uhl said that metric didn’t matter much, because it’s squeezing more cash out of each barrel as a result of the strategic change.
Some analysts have debated whether Shell is at risk of under-investing as it focuses on shareholder returns. Martijn Rats of Morgan Stanley said last week that $65 crude may be too low for the company to continue its breakneck pace of cash distributions while maintaining sufficient spending to boost reserves.
After the earnings, he noted that the low reserves replacement ratio was largely due to a one-time event — the de-booking of a Dutch gas field ordered to close after causing earthquakes. Otherwise the company would have replaced 98 percent of the oil and gas it pumped, he said.
Uhl insisted that Shell can achieve growth, complete its $25 billion buyback and distribute dividends at $60 oil. The refining and marketing, and integrated gas businesses both did better than analysts expected, buoyed by trading and the startup of a U.S. chemicals plant.
Fourth-quarter oil and gas output was 3.79 million barrels of oil equivalent a day, compared with 3.76 million a year earlier. New projects will deliver 150,000 barrels a day of new output this year, “more than enough” to offset declines, Van Beurden said.
“We’re going to do it all, we need to do it all,” Uhl said in a Bloomberg television interview. “It’s important for you to understand the nature of Shell, the nature of our cash flows, which aren’t necessarily dependent on excessive levels of capital investment.”