Royal Dutch Shell plc: Slowly But Surely Improving

Despite a 44% year-over-year decline in quarterly profit, Royal Dutch Shell looks to be on a slow yet steady path to improvement.

May 9, 2014 at 9:00AM

Last week, Royal Dutch Shell plc (NYSE:RDS-A), Europe's largest oil company by market capitalization, reported a 44% year-over-year decline in its first-quarter profit. Yet better than expected performance from some of Shell's business segments was greeted favorably by the markets, sending the company's shares higher by a few percentage points on the day.

While Shell still has a long way to go in improving its financial performance and boosting returns on capital, the company's first-quarter results offered three encouraging signs. Let's take a closer look.


Photo Credit: Wikimedia Commons.

Progress in the downstream division
The first encouraging development was a meaningful improvement in Shell's downstream segment, which posted adjusted refining profit of $1.1 billion, even though refining margins weakened across all company operating regions except for the U.S. Gulf Coast. Reflecting the company's outlook for continued pressure on downstream margins, it wrote off $2.3 billion in refining assets, most of it related to its Bukom facility in Singapore.

As part of its new strategy, Shell is restructuring its downstream business by divesting its least profitable refining assets. During the first quarter, the company agreed to sell its downstream business in Australia (excluding aviation), including the Geelong refinery and its network of some 870 retail gasoline stations, to commodities trading house Vitol for $2.6 billion. It also reached an agreement to sell certain downstream assets in Italy.

Shell now plans to divest its downstream refining and marketing businesses in Norway, Denmark, and the Czech Republic. That should enable the company to gradually improve the division's return on capital, which averaged 7% over the past 12 months. Shell believes that its downstream division has the potential to deliver 10%-12% return on capital and generate some $10 billion in annual cash flow.  

Upstream Americas performance improving
The second piece of encouraging news was that Shell's upstream Americas business -- its other main underperforming division -- finally swung to a profit of $550 million during the first quarter thanks primarily to higher natural gas prices in North America and the acquisition of South American liquefied natural gas assets from Repsol.

The division had been a consistent loss maker due to poor drilling results that resulted in substantial writedowns in the value of its shale assets. To improve the division's returns, Shell plans to reduce upstream Americas spending by 20% this year and has already announced the sales of various shale assets, including acreage in Texas' Eagle Ford and Kansas' Mississippi Lime play.

Going forward, Shell will continue to focus its upstream Americas efforts on its most promising opportunities, mainly in the Gulf of Mexico and West Texas' Permian Basin, which should help gradually improve the unit's returns.

Cash flow up sharply
Lastly, and most important, Shell's cash flow is finally outpacing spending. First-quarter operating cash flow came in at $14 billion, up 21% year over year and the highest level in quite some time, compared to capital spending of $10.7 billion for the three-month period. This helped the company generate $6 billion in free cash flow, which was easily enough to cover dividends.

Generating stronger cash flow will remain key for the company. In previous years, Shell struggled to fund its capital expenditures through operating cash flow as spending ballooned to record levels, causing investors to question the sustainability of its dividend payments. But with major high-margin projects slated to start over the next few years, and with spending expected to decline considerably, cash flow looks set to improve big time.

If Shell can continue to deliver its high-margin projects on time and on budget, and assuming Brent crude prices hold steady above $100 per barrel, the company's target of $45 billion in annual operating cash flow over the next few years may be achievable. Hitting that goal should enable the company to grow its dividend at a modest pace in coming years.

Investor takeaway
Despite a plunge in its first-quarter earnings, Shell's efforts to restructure its underperforming downstream and upstream Americas businesses are progressing slowly but surely, while cash flow looks set to improve sharply as new high-margin projects come online over the next couple of years. Though Shell still has a lot of work to do in improving its returns on capital, the company certainly appears to be on the right track.

Will this stock be your next multibagger?

While Shell is making steady progress in improving its financial performance, there's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers