A lot of analysts and investors -- myself included -- had their doubts about Royal Dutch Shell's (NYSE:RDS-A) (NYSE:RDS-B) ability to integrate BG Group and improve returns in a low oil price environment at the same time. Based on the company's fourth-quarter results, though, it appears to be doing just that. Here's a quick look at the company's results for the quarter and what investors can expect in the coming year or two.
By the numbers
|Results*||Q4 2016||Q3 2016||Q4 2016|
|Earninigs per share (ADS)||$0.38||$0.34||$0.30|
|Operational cash flow||$9,170||$8,492||$5,423|
Last quarter looked like a pretty good one for a company that's trying to drag itself out of one of the worst industry slumps in years and incorporate a major transaction at the same time. Considering that, this one was even better.
Unlike last quarter, where cash flows were supported in part by a large drawdown in working capital, Shell's fourth-quarter cash generation was from day-to-day operations and from dividends paid by is joint ventures and equity investments. Those are the things you want to see. It's also encouraging that the $9.1 billion in cash was enough to cover its capital spending and its dividend payments, which is something it has struggled to do for a while.
It's been difficult to assess Shell's underlying business for several quarters because it has either sold off or written down billions in assets. So, to get an idea of the operations of the business, let's look at the company's earnings excluding identified items.
Chemicals and Oil products remained rather steady. This is a little surprising because several other U.S.-based refiners have reported rather weak results. Part of the reason Shell was able to produce decent results is because it saw much better performance from its Europe and Singapore refineries, where margins were markedly better than in the prior quarter. This helped to offset the modest declines in operations in the U.S.
The other encouraging sign was that its upstream production unit turned a profit again. Most of the gains here were from stronger results from Europe and Asia. Also, losses from its North America segment narrowed to $348 million, the smallest loss from this part of the business since 2014. A lot of this was due to the company's ability to lower its cost structure. Management has been able to reduce its cash operating costs by a very impressive $10 billion over the past 24 months.
With that excess cash from operations, Shell was able to pay back $3.1 billion in debt, and it ended the quarter with a debt-to-capital ratio of 28%.
What management had to say
CEO Ben Van Beurden:
Production and LNG volumes included delivery from new projects, with ramp-up continuing in 2017 and 2018. Meanwhile we are operating the company at an underlying cost level that is $10 billion lower than Shell and BG combined only 24 months ago. We are gaining momentum on divestments, with some $15 billion completed in 2016, announced, or in progress, and we are on track to complete our overall $30 billion divestment programme as planned.
Looking ahead, we will further focus the portfolio and strengthen the company's financial framework in 2017. Our strategy is starting to pay off and in 2017 we will be investing around $25 billion in high quality, resilient projects. I'm confident 2017 will be another year of progress for Shell to become a world-class investment.
It seems as though Shell is actually pulling this BG integration off. Considering the size and scale of the deal, it wouldn't have been surprising if it had stumbled a bit, but you have to give credit where credit is due. The company still has a lot of assets it wants to shed in order to improve overall profitability, but it has started off the year right in that regard with more than $5 billion in asset sales in 2017 already. Investors should see where management decides to put that cash from asset sales to work. It has said previously that it was going to go toward buying back shares, but it wouldn't be surprising if we saw the company look to pay down some debt first.