By Nick Cunningham
Royal Dutch Shell saw its profits jump by 42 percent in the first quarter, leading to the best quarterly results in years. Yet Wall Street is still skeptical of Shell and many of the other oil majors.
The jump in oil prices to a three-year high was a boon to the earnings of the Anglo-Dutch oil company. On a current cost of supply basis – similar to net income – Shell earned $5.3 billion, slightly beating expectations. That compared favorably to the $3.75 billion Shell earned in the first quarter of 2017.
Profits of this size have not been seen since oil was last trading in triple-digit territory, prior to the 2014 oil market meltdown.
“Shell’s strong earnings this quarter were underpinned by higher oil and gas prices, the continued growth and very good performance of our Integrated Gas business, and improved profitability in our Upstream business,” Shell’s CEO Ben van Beurden said in a statement.
At first glance, the numbers seem impressive. But Wall Street and oil analysts were disappointed. “I think the problem with the numbers this morning is that the cash flow generation was disappointing. The earnings were very strong but it didn’t get pulled through into cash generation,” Jason Gammel, equity analyst at Jefferies, told CNBC.
Shell’s cash flow was slightly down from a year ago, dipping from $9.5 billion to $9.43 billion. The numbers were particularly disappointing because the first quarter tends to be the strongest period for Shell and its peers. Shell’s CFO said the company incurred higher expenses related hedging at higher oil prices, combined with one-off tax payments.
Shell’s share price fell 3 percent in early trading on Thursday.
Another reason for the sour mood on Wall Street is that investors are demanding a greater slice of the pie. Shareholders are already expecting the oil majors to post the largest profits in years, and they want those profits to be dedicated to higher dividends and share buybacks.
Although Shell has laid out plans for a massive $25 to $30 billion share buyback program, the company declined to detail when those repurchases might begin. “It’s an integrated decision. I’ve provided enough insight,” CFO Jessica Uhl told reporters when asked about share buybacks. For now, Shell is prioritizing debt reduction, which became an urgent matter when it racked up nearly $80 billion in net debt after the $50 billion purchase of BG Group two years ago.
However, Shell’s cash flow “may not necessarily support” the share buyback program, according to RBC Capital Markets. Still, RBC said that the financials will improve over the course of the year because of the positive “macro environment,” and that Shell “remains one of our preferred super-majors.” Barclays predicts the share buybacks will begin later this year.
French oil giant Total SA also reported results this week, figures that received a more positive reaction from Wall Street. Total reported its highest profits in years, and also reported a 5 percent increase in oil and gas production. Cash flow also jumped. “Cash flow after organic investments increased to $2.8 billion, up by more than 50 percent from a year ago, thanks to good operational performance and continued spending discipline,” Total CEO Patrick Pouyanne said. Crucially, for Wall Street, Total decided to hike its dividend by 3.2 percent, with plans to increase the dividend 10 percent over the next three years. Production is expected to rise quite a bit again this year on the startup of projects in Angola, Australia and the ongoing output gains at the massive Kashagan project in Kazakhstan.
Even as profits have improved significantly over the past two years, the share prices of many of the oil majors are flat or even down. That is especially striking given the incredibly run up in the broader stock market over the course of 2017. Part of the skeptical reaction from investors is the result of newfound expectations. Wall Street is no longer in favor of the oil majors spending recklessly in the pursuit of growth. Just as shareholders are demanding profits over production growth from smaller shale companies, the same is true of the oil majors.
With the long-term state of the oil market up in the air, investors simply want Big Oil to keep spending in check, increase cash flow and return profits to shareholders. “They just need to stick to their knitting,” Rohan Murphy, energy analyst at Allianz Global Investors, a Shell investor, told the Wall Street Journal in an interview. He said the oil majors need to “show that they’re not going to start spending willy-nilly again.”