Shell's (RDS.A) Q3 Earnings Beat Amid Higher Oil, Cost Cuts

Europe’s largest oil company Royal Dutch Shell (LON:RDSa) plc RDS.A reported strong third-quarter results on all round contribution from all its segments. In particular, rebounding commodity prices and cost cuts helped the company follow continental rival BP plc (NYSE:BP) in coming out with better-than-expected numbers.

The Hague-based Shell reported earnings per ADS (on a current cost of supplies basis, excluding items - the market’s preferred measure) of $1.00, breezing past the Zacks Consensus Estimate of 83 cents and the year-ago adjusted profit of 70 cents.

Revenues of $77,733 million were 23.5% above the third-quarter 2016 sales of $62,938 million. Meanwhile, operating expenses fell in the quarter to $9,477 million compared with $9,994 million in the corresponding period last year.

Segmental Performance

Upstream: Upstream segment recorded a profit of $562 million (excluding items) during the quarter, soaring from the paltry $4 million (adjusted) achieved in the year-ago period.

This primarily reflects the impact of higher oil and gas realizations, revised assessment of a deferred tax asset and an arrears settlement agreement, partly offset by increase in depreciation charges.

Shell’s upstream volumes averaged 2,656 thousand oil-equivalent barrels per day (MBOE/d), 1% lower than the year-ago period. Liquids contributed approximately 61% to Shell’s total volumes, while natural gas accounted for the remaining portion.

Apart from the obvious BG role, production during the quarter compared with the year-ago quarter included volumes from new field start-ups and continued ramp-up of existing fields – particularly Kashagan in Kazakhstan, the Lula, Iracema and Sapinhoá fields in Brazil and Stones, Olympus and Mars in the Gulf of Mexico – that boosted output by roughly 243 MBOE/d. However, this was more than offset by the impact of normal field declines and asset sales.

Shell’s worldwide realized liquids prices were 16.4% above the year-earlier levels while natural gas prices were up 21.3%.

Downstream: In the downstream segment – that focuses on refining, marketing and retailing – the Anglo-Dutch super-major reported adjusted income of $2,668 million, 28.4% more than the $2,078 million earned in the year-ago period. The positive comparison reflects the impact of ‘improved refining and chemicals industry conditions’.

Integrated Gas: The Integrated Gas unit reported adjusted income of $1,282 million, a 37.7% improvement from the $931 million in July-September quarter of 2016. Results were favorably impacted by increase in commodity prices and higher LNG volumes (production and liquefication). Partly offsetting these factors were revised assessment of a deferred tax liability and higher depreciation.

Cash Flow

During the quarter under review, Shell generated cash flow from operations of $7,582 million, returned $4,000 million to shareholders through dividends and spent $5,742 million on capital projects. Despite falling from the year-ago period, the company’s resilient cash generation has helped it to cover dividend payments. Importantly, the group raked in $3,670 million in free cash flow during the third quarter, up from $3,324 million a year ago.

Balance Sheet

As of Sep 30, 2017, the company had $20,699 million in cash and $88,356 million in debt (including short-term debt). Net debt-to-capitalization ratio was approximately 25.4%, down from 29.2% a year ago following the BG Group acquisition. The improvement in the group’s debt ratio was helped by cost cuts and asset sales (worth more than $26 billion since 2016).

Share Performance: Royal Dutch Shell has gained 15.5% of its value during the third quarter, outperforming the 10.8% rally of the industry it belongs to.

Zacks Rank & Stock Picks

Royal Dutch holds a Zacks Rank #2 (Buy).

Apart from Shell, one can look at other buy-ranked integrated energy players like ExxonMobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) ExxonMobil sports a Zacks Rank #1 (Strong Buy), while Chevron holds Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Irving, TX-based ExxonMobil is the world’s largest publicly traded oil company, engaged in oil and natural gas exploration and production, petroleum products refining and marketing, chemicals manufacture, and other energy-related businesses. company’s expected EPS growth rate for three to five years currently stands at 13.1%, comparing favorably with the industry's growth rate of 8.4%.

San Ramon, CA-based Chevron is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses. Over 30 days, the firm has seen the Zacks Consensus Estimate for 2017 and 2018 increase 4.2% and 8.1%, to $4.21 and $4.96 per share, respectively.

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