Shell Pumps a Torrent of Cash as Takeover, Cost Cuts Pay Off

(Bloomberg) -- Royal Dutch Shell Plc showed it has adapted to a world of lower oil prices, generating a surge in cash that allowed it to pay dividends while reducing debt.

The Anglo-Dutch company's first-quarter performance helps validate Chief Executive Officer Ben Van Beurden's $54 billion purchase of BG Group Plc -- for which some shareholders complained he overpaid -- and the deep spending cuts and asset sales he undertook to protect the balance sheet.

“With new projects starting and higher-cost assets being sold, you'd expect cash generation to only increase,” said Iain Armstrong, an analyst at Brewin Dolphin Ltd., which owns Shell shares. “It's becoming a cash-generating machine.”

Shell has adjusted its business to $50-a-barrel crude by cutting costs, increasing production and learning to live within its means. The company beat first-quarter profit estimates, as did its “supermajor” peers -- Exxon Mobil Corp., Chevron Corp., Total SA and BP Plc -- all of which tightened their belts following oil's collapse.

Shell's cash flow from operations expanded more than 10-fold to $9.51 billion in the quarter, the company said Thursday in a statement. After taking out the cost of investments, free cash flow of $5.18 billion covered the cash portion of the dividend for a third consecutive quarter. The total dividend payout was $3.9 billion, of which $2.7 billion was paid in cash and the remainder as shares, the company said.

That's a big change from the depths of the oil-price slump a year earlier, when Shell was borrowing money to cover shareholder payouts. Net debt fell for a second consecutive quarter to $72 billion. Gearing, or net debt to capital, narrowed to 27.2 percent from 28 percent at the end of last year. The company aims to bring that down to 20 percent over time, Chief Financial Officer Jessica Uhl said.

Profit adjusted for one-time items and inventory changes more than doubled to $3.75 billion from $1.55 billion a year earlier, surpassing the $3.01 billion average of analyst estimates.

Profit in Shell's upstream, or exploration and production, business totaled $540 million in the quarter, compared with a loss a year earlier. The downstream division, which includes refining and marketing, posted income of $2.49 billion, an increase of 24 percent.

Norwegian peer Statoil ASA also announced results Thursday, reporting a 10-fold jump in profit. Spain's Repsol SA said earnings increased 10 percent. Statoil's shares gained as much as 3.7 percent, while Shell's B shares, the most widely traded, advanced as much as 3.6 percent. Repsol was down 0.4 percent as of 12:20 p.m. in Madrid.

Still, all the supermajors' stocks have dropped since the start of the year as the rally in crude prices -- up 55 percent in the first quarter from a year earlier -- faltered.

“The risk to the good show by the supermajors is oil prices falling below $50,” Brewin Dolphin's Armstrong said.

Benchmark Brent is trading around $50.34 a barrel in London, down 11 percent this year as the Organization of Petroleum Exporting Countries and its allies struggle to eliminate a global supply glut. Oil was about $60 when Shell announced its BG acquisition in April 2015.

The company piled up borrowings following the deal and has set a $30 billion asset-sale target for the three years to 2018. It's about two-thirds of the way there following divestments in Canada, Gabon and the U.K. North Sea. It's also planning to sell fuel stations and a refinery in Argentina.

--With assistance from Javier Blas

To contact the reporter on this story: Rakteem Katakey in London at rkatakey@bloomberg.net.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Dylan Griffiths, Alex Devine