Shell Smashes Estimates as BG Acquisition Drives Up Output

  • Oil producer beats expectations at upstream, downstream units
  • Capital expenditure seen at lower end of guidance next year

Earnings Winners and Losers of Oil's Price Rebound

Royal Dutch Shell Plc reported third-quarter profit that beat analyst estimates after its acquisition of BG Group Plc boosted oil production, helping to counter a slump in prices. The shares rose.

Profit adjusted for one-time items and inventory changes advanced 17 percent from a year earlier to $2.79 billion, Shell said Tuesday. That exceeded the $1.79 billion average estimate of analysts surveyed by Bloomberg, and the earnings of U.S. giant Exxon Mobil Corp. U.K. competitor BP Plc reported a 49 percent slump in profit.

Chief Executive Officer Ben Van Beurden, who completed Shell’s record purchase of BG in February, has vowed to boost savings from the acquisition and use higher cash flows to safeguard the dividend following a two-year slump in crude. While the purchase increased Shell’s production from Australia to Latin America, it also forced the company to take on billions of dollars of debt and limit spending.

Shell expects capital investment to be about $25 billion in 2017, at the bottom of its $25 billion to $30 billion guidance and lower than this year’s $29 billion. The company generated $8.5 billion of cash from operations in the third quarter and sold $200 million of assets.

“The beat is showing the accretive nature of the BG portfolio and the low-cost barrels Shell has got,” said Oswald Clint, a London-based analyst at Sanford C. Bernstein & Co. “Cash flow was also well above expectations and the market will be looking at that. They could balance their books at $50 oil next year.”

For a quick wrap of the analyst commentary today, click here.

Benchmark Brent crude averaged $46.99 a barrel in the quarter, down from $51.30 a year earlier. It’s now trading around $49.

Divisional Results

Profit from exploration and production totaled $4 million in the quarter, compared with a year-earlier loss. The downstream result, which includes refining and distribution, declined 21 percent to $2.08 billion. Both divisions beat analyst estimates provided by the company.

Shell’s B shares, the most widely traded, jumped as much as 3.9 percent to 2,198 pence in London trading, and were at 2,197 pence as of 10:30 a.m. local time. The stock has increased 42 percent this year.

“Shell delivered better results this quarter, reflecting strong operational and cost performance,” Van Beurden said in a statement. Earnings “benefited from increased production volumes mainly from BG assets, lower operating expenses more than offsetting the increase related to the consolidation of BG, and lower well write-offs.”

BG Contribution

Oil and gas production totaled 3.6 million barrels of oil equivalent a day, up 25 percent from a year earlier. BG pumped about 600,000 barrels a day in 2014, the level of output at which it was valued, Shell Chief Financial Officer Simon Henry said on a conference call on Tuesday. That has increased to an average of about 800,000 barrels a day this year, he said.

“We are now seeing the benefit of the acquisition on the bottom line,” he said. BG had “positive earnings and small positive free cash flow in the third quarter.”

Shell, based in The Hague, completed the purchase of BG for $54 billion on Feb. 15. The merger gave it a 20 percent share of the global liquefied natural gas market as well as high-margin oil fields in Brazil.

Rival BP reported a decline in quarterly earnings to $933 million from $1.8 billion on Tuesday after crude prices fell, refining margins shrank and its exploration and production division posted a loss. Although the company beat analyst estimates, its shares fell 1.9 percent to 474.5 pence in London.

Challenging Prices

The oil collapse that began in mid-2014 has compelled explorers to delay projects, cancel billions of dollars of investments and cut jobs. While crude has increased more than 30 percent this year, low prices continue to be a “significant challenge,” Van Beurden said.

The CEO has renegotiated contracts, eliminated more than 12,000 positions and started a $30 billion asset-sale program to weather crude’s collapse. The company is preparing for a “lower forever” oil-price environment, Head of Upstream Operations Andy Brown said last month.

Capital expenditure was $7.7 billion in the third quarter. The company paid $3.8 billion in dividends, of which the equivalent of $1.1 billion was given to stockholders in shares.

Exxon, the world’s biggest oil company by market value, said Oct. 28 its production sank to a seven-year low and extended a run of profit declines. Chevron Corp. posted its first profit in a year though production fell short of expectations. While cost cuts helped Total SA beat estimates, Eni SpA reported wider-than-expected losses and Statoil ASA posted a surprise loss.

Shell and its European competitors have cut the cost of operations through the downturn while increasing borrowings to maintain dividends. Shell’s acquisition of BG forced it to borrow even more. The company’s net debt to capital, also called gearing, was at 29.2 percent at the end of the third quarter, compared with 12.7 percent a year earlier.

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