Shell Q3 Profit Trumps Estimates, But Low Oil Prices Remain A Challenge

Following a dismal second quarter, Royal Dutch Shell (NYSE:RDS.A) reported on Tuesday a third-quarter profit that trumped analyst estimates. Despite the profit, Shell cautioned that low oil prices are still a significant challenge across the board.

Shell booked the current cost of supply earnings excluding exceptional items – its measure for earnings – of US$2.792 billion for the third quarter, an 18-percent rise compared to the same period last year. Analysts surveyed by Bloomberg had expected Shell’s third-quarter profit to come in at around US$1.79 billion.

Shell attributed the earnings increase to higher production volumes following the acquisition of BG and to lower operating expenses, which were partially offset by lower oil, gas and LNG prices and weaker refining industry conditions.

In the upstream business, Shell returned to profit, albeit a very small one, of US$4 million, compared to a loss of US$582 million for the third quarter last year, and to the hefty US$1.325-billion loss for the second quarter this year. Higher volumes resulting from the BG acquisition helped Shell post a profit in the upstream segment, but earnings were small as they were hit by the decline in oil and gas prices, and higher depreciation mainly resulting from that very same acquisition of BG.

Shell’s downstream earnings continued to provide a cushion for the consolidated earnings. Still, downstream profits dropped to US$2.078 billion for the third quarter from US$2.617 billion for the third quarter last year, on the back of “weaker refining industry conditions, and lower trading margins”.

Shell is also joining the ranks of (almost) all oil majors with continued cuts in capital investment. This year’s organic capital investment at Shell would be around US$29 billion, or some US$18 billion below the 2014 Shell and BG levels combined. For 2017, the group expects capex at around US$25 billion, at the low end of its US$25 billion-$30 billion range.

Shell’s gearing – that is net debt as a percentage of total capital – was 29.2 percent at the end of September, compared with 12.7 percent at the same point last year, mostly due to the BG deal. That’s very close to the group’s ‘comfort zone’ of 30 percent gearing. Back in July, CFO Simon Henry said, commenting on the Q2 results, when gearing was 28.1 percent:

“We’re close to the maximum level and it could go up still with the oil price where it is. Thirty percent is an upper limit to where we can describe our position as comfortable.”

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Nevertheless, Shell kept dividends for the third quarter at US$0.47 per share, and at US$0.94 per ADS.

Despite recovering profits and the fact that its upstream business was modestly back in black, Shell’s chief executive Ben van Beurden was cautious about the near future.

“…lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain,” the manager said in the company’s earnings release.

By Tsvetana Paraskova for Oilprice.com

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