Shell Hits its Investment Goals
Anglo-Dutch major Shell reported January 31 a strong financial end to 2018, with debt gearing down to 20.3%. Its free cash flow and average return on capital were up; its $30bn asset sale was not only completed at "attractive valuations" but also made its credit ratings stronger; and it has just announced a new round of share buy-backs.
The company is setting out its stall as a world-class investment case, and although the year was marred by accidents and two contractor fatalities, the company has met the targets it set itself.
In the quarter, integrated gas earned $2.4bn (up from $1.6bn in Q4 2017); upstream earned $1.9bn (up from $1.7bn in Q4 2017); and downstream earned $2.1bn (up from $1.4bn in Q4 2017). This generated current cost supplies earnings of $5.7bn (up from $4.3bn in Q4 2017), after deducting corporate and non-controlling interest losses of $700mn, which was worse than the $400mn in the same quarter 2017.
The fourth quarter saw the highest-priced oil of 2018, which was reflected in the upstream and integrated gas figures; and the company says it is continuing to high-grade its portfolio and looks forward to more value from its barrels as it sheds assets with decommissiong liabilities or that have political or other risks attached to them. And new projects will deliver over $10bn in cash flow from operations.
"We are now a simpler company able to deliver high returns," CEO Ben van Beurden told journalists. The BG purchase had paid for itself and was starting to deliver.
Organic free cash-flow for the year was $31bn and "very disciplined" capital expenditure will remain in the $25-$30bn/yr range. Its return on average capital employed was 7.6% in Q4 2018 and is on track to reach 10% by the end of next year.
The Dutch government decision to cut Groningen output caused a 600mn barrels of oil equivalent cut to reserves, as Shell is with ExxonMobil the operator of the production company Nam. This resulted in a reserves replacement ratio for the year of about 66% excluding asset sales and purchases. Excluding both those it was 98%, in line with the three-year average.
LNG accounted for a big chunk of the free cash-flow. Less midstream maintenance and 3% more gas availability enabled more sales from Oman, Nigeria, Australia and Trinidad & Tobago, while its Egyptian liquefaction project also produced more cargoes last year as Egypt reduced imports before stopping them. Shell has rights to half the output, and "we are squeezing out what we can there," Maarten Wetselaar told NGW.
He said the cargoes were going to Asia and Europe with Egyp well placed for either market; the milder Asian temperatures and stronger European prices were dragging more LNG westwards and there is now no arbitrage on Europe-Asian trade, he said. Last year the EU saw 5mn metric tons more LNG than it had in 2017, he said.
Its long-awaited Prelude project offshore Australia is still only at the condensates production stage, but four of the seven gas wells have been opened and commissioning the liquefaction is under way. "We are ready for the first condensates cargo, and then comes the LNG," van Beurden said. The plant has been due to start up for some time, but he said there had not been liquefaction problems.
Integrated gas generated $5.8bn in the quarter; upstream, $6.9bn; downstream, $8.8bn and corporate $0.6bn, or almost three times the $7.3bn in Q4 2017.