Royal Dutch Shell Plc 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 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 2 1/2 year downturn.
“Our strategy is starting to pay off,” Chief Executive Officer 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.
U.S. peers Chevron Corp. and Exxon Mobil Corp. 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.
“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.