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July 26, 2018, by Kelly Gilblom
(Bloomberg)
Royal Dutch Shell Plc finally gave investors the share buybacks they’ve been demanding, even as profit fell short of expectations despite resurgent crude prices.
The Anglo-Dutch energy producer said Thursday that it is starting a $25 billion share-repurchase program, initially buying up $2 billion of stock over three months. That should soothe investors who have grown increasingly anxious about when they’ll see the reward for sticking with Shell through the biggest oil-industry downturn in a generation.
It wasn’t all good news, as adjusted net income for the second quarter of $4.69 billion fell short of even the lowest analyst estimate. Its peers Equinor ASA and Total SA nearly matched or exceeded profit expectations.
Shell’s management resisted starting buybacks in the first quarter, saying its priority was paying down debt that ballooned after the more than $50 billion acquisition of BG Group Plc in 2016. Since then, crude has risen to a three-year high, cash flow has surged and the company has made further progress in paying down its borrowings.
“Cash flow is what’s critical here,” said Oswald Clint, an analyst at Sanford C Bernstein Ltd. “It’s just confirming the strength of the integrated Shell-BG business.”
Cash flow for the quarter reached $11.6 billion, excluding working capital movements, the highest since 2014 when crude averaged over $100 a barrel, Shell Chief Executive Officer Ben van Beurden said in a Bloomberg television interview.
Still, shares fell immediately after the market open and continued to decline as Van Beurden and Chief Financial Officer Jessica Uhl explained in a call with reporters that much of the earnings miss was largely due to one-time issues such as the rapid strengthening of the U.S. dollar against the Brazilian real in the quarter. Uhl also blamed the opacity of the trading business for the difference between estimates and income.
“We had overall a very good quarter. That being said, there were different expectations on the earnings side,” said Uhl. Currency moves “had a real impact that can be difficult to anticipate and model.”
Additional questions arose about the structure of the buyback program. Though it will vary quarter by quarter, according to Uhl, some thought it would have a stronger start. Christyan Malek, an analyst at JPMorgan Chase & Co., estimated the company would complete $8 billion of buybacks in the second half of 2018. That would require Shell to repurchase $6 billion of shares between October and December, triple the current pace.
Shell B shares in London fell 3 percent to 2,644 pence at 10:28 a.m. in London. Equinor dropped 1.4 percent in Oslo, while Total rose 1.6 percent in Paris.
Now the question of buybacks has been answered, investors will also be keenly watching for any indication from management about how Shell will spend surplus cash. After years of selling assets, the company has signaled a desire to return to growth mode.
A rush of activity in northwestern Canada has increased speculation Shell could give the go-ahead for a $30 billion liquefied natural gas project this year. The company is also said to have bid, with a partner, for BHP Billiton Ltd.’s U.S. onshore oil and gas business, which could be worth about $9 billion.
Shell’s total oil and gas production from the upstream division fell 7 percent in the second quarter, compared to a year earlier, to 2.488 million barrels of oil equivalent a day, mainly due to asset sales. The company predicted a further reduction in output this quarter, partly as a result of higher maintenance.
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