London - Royal Dutch Shell appeared to put the worst of
the oil slump behind it as rising cash flow allowed Europe’s largest energy
company to trim debt for the first time since the downturn began.
Investors looked beyond a worse-than-expected fourth
quarter profit, sending shares higher. Following billions of dollars of cost
reductions and a recovery in oil prices just as production rose last year,
the company generated enough cash to cover spending and dividends for a second
consecutive quarter -- assuaging what has been a key concern for shareholders
throughout the two-and-a-half year downturn.
“Our strategy is starting to pay off,” CEO Ben van
Beurden said in a Bloomberg television interview. “Free cash flow is well above
requirements, we have started to pay down our debt in the fourth quarter. I do
think we are on track. But we still have a long way to go.”
Big challenges remain. The recovery in oil prices to
around $55 a barrel only lifted Shell’s exploration and production unit to just
above break-even. Meanwhile, the higher cost of crude sapped the profitability
of its refining and trading operations. That was reflected in fourth quarter
adjusted profit of $1.8 billion that was a billion dollars short of analysts’
expectations. Shell’s performance fell short at all three of the company’s main
units: exploration and production, refining and natural gas.
Read also: Shell sells oil fields worth $4.7bn
US peers Chevron and Exxon Mobil also announced earnings
well short of estimates. In a sign of how tough 2016 was for the world’s
biggest oil companies, Shell delivered a return on capital employed of just 2.9
percent, only fractionally higher than the record low of 2.8 percent in 1998
and the second-lowest in more than 60 years, according to Sanford C. Bernstein
& Co.
Cash-flow story
“Though they missed earnings estimate, actually it’s a
great result,” said London-based Sanford C. Bernstein analyst Oswald
Clint. “This is a cash-flow story, which was pretty impressive. It was well
ahead of anyone’s expectations.”
Shell made further progress toward paying down debt
earlier this week, announcing the sale of fields in the North Sea and Thailand
for as much as $4.7 billion. The company’s $30 billion divestment program is on
track and a further $5 billion of asset sales are in “advance progress,” the
company said.
The Shell CEO has made debt reduction a top priority
since he piled up borrowings following its $54 billion purchase of BG Group Plc
last year. And he’s making progress. Gearing - a measure of indebtedness -- was
28 percent at the end of the year, down from 29.2 percent at the end of the
third quarter. Cash flow jumped 69 percent from a year earlier to more than $9
billion.
The company’s B shares rose 1.5 percent to 2 255.5 pence
at 8:56 a.m. in London. The stock advanced 53 percent in London last year, the
first annual gain in three.