More earnings reports are trickling in. Royal Dutch Shell is the last oil major to report first quarter earnings, and like its peers, the Anglo-Dutch company saw its profits tumble.
Shell’s current cost of supplies, likened to net profits, crashed by 83 percent from a year earlier, falling from $4.8 billion to just $0.8 billion. The results were the first since the company completed the $54 billion purchase of BG Group, and the combined company “is off to a strong start,” Shell’s CEO Ben van Beurden said. The good news for Shell is that the merger is moving quickly and the company is not seeing its cost structure rise. Related: Oil Prices Fall Back as Rally Hits a Ceiling
BG Group has also added quite a bit of production to the combined company’s output.
Still, Shell is still spending too much money. Shareholders are pressing the company to reduce spending to $30 billion so as to ensure the longevity of the company’s dividend payout. Shell outlined $3 billion in spending cuts to bring 2016 spending down to $30 billion. "Can we go further? Yes, we can," Shell’s CFO Simon Henry, said to reporters following the release. Shell also wants to sell off $30 billion in assets by the end of 2018. Related: Another Major Natural Gas Pipeline Project Bites The Dust
But as The Wall Street Journal noted, Shell is still not covering its high levels of capex and its dividend with cash flows. In the first quarter, Shell generated $4.6 billion in cash flow, but spent $6.1 billion on capex. And that does not take into account money going out the door in the form of dividends. Excluding proceeds from asset disposals, Shell needs oil prices to trade somewhere around $70 per barrel in order to cover capex.
The oil major is taking on more debt to cover the shortfall. Net debt to total capital increased to 26 percent following the BG purchase. Its debt levels will continue to climb until oil prices move much higher. Shell hopes its cash flow outlook will improve as the massive Gorgon LNG project in Australia comes back online and the mammoth Kashagan oil field in the Caspian Sea, in which Shell has a stake, finally begins operations.
By Charles Kennedy of Oilprice.com
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