Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

When a company misses earnings expectations by $1 billion, investors are usually well advised to dash for the panic room. But for Royal Dutch Shell PLC, which served up that beauty on Thursday, profit doesn't matter much right now. Cash does.

Having spent $64 billion on BG Group PLC, as the oil price collapsed, Shell’s short-term priority is paying down more than $70 billion of net debt and covering dividend payments.

The good news is that for the second quarter in a row Shell’s operating cash flow was enough to cover capital expenditure and shareholder payouts. That meant cash received from the first bit of a $30 billion divestment plan could be used to cut borrowings by a little. Net debt fell $4.5 billion between October and the end of December. 

Cash Balance
Shell was able to pay down debt in the fourth quarter via divestments
Source: Shell data and Gadfly calculations

While any progress is welcome, chief executive Ben van Beurden still has a huge task ahead. Gearing (net debt to capital) remains uncomfortably high at 28 percent. Among listed oil and gas producers only Petroleo Brasileiro SA has larger net liabilities.

Big Borrowers
The BG deal swelled Shell's net debt to more than $70 billion but it's started to decline, a bit
Source: Bloomberg

Until debt comes down more, Shell investors will continue to fret about the dividend. Despite climbing more than 50 percent over the past year, Shell's shares still yield 6.6 percent. Even though interest rates are rising, reducing pressure on investors to seek yield from equities, that seems mighty attractive -- unless of course Shell has to slash payouts. 

But a combination of cost controls and a higher oil price -- Brent is back above $56 -- means it should scrape by.

Van Beurden promises to restrict capital expenditure to about $25 billion in 2017, modest by Shell’s gargantuan standards. The rebound in crude, if sustained, should add about $5-6 billion in cash flow this year. Meanwhile, Shell announced $5 billion of asset sales this week and another $5 billion are in the works. Plus it’s ramping up a number of new cash-generating projects.

Taken together, there are good reasons to think operating cash flow this year should be rather better than the $20.6 billion Shell generated in 2016.

That's cash. In the long-term, of course, earnings also matter and it's here that Shell needs to up its game. Shareholders and bondholders have handed it more than $280 billion in capital to play with but it’s earning a miserable return: 2.9 percent on a current cost of supply basis. Lifting that to 10 percent by the end of the decade, as the company intends, is going to take yet more hard graft.

Shell can no longer count on its refining operations to paper over the cracks. The division delivered consistently good profit when oil prices collapsed, but as prices rise refiners are finding it tough to pass higher input costs onto customers. Shell's refining and profit collapsed by almost 90 percent in the fourth quarter.

Upstream is no cakewalk either. Buying BG has lifted Shell’s oil and gas production by more than one quarter, yet its upstream operations have barely made a profit during the past six months, even with oil prices above $50.

The consolation is that, thanks to the BG deal, at least Shell doesn’t need to go shopping again to replenish reserves. The assets it acquired are high-quality and relatively low-cost. Time to make them sweat.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at

To contact the editor responsible for this story:
James Boxell at