Shell Profits Up as Disposals Plan Nears End (Update)
(Adds details, comments from executives, analyst)
In its full year 2017 results presentation February 1, Shell outlined how it means to expand its upstream portfolio, benefit from strong LNG sales, deal with legacy gas issues in the Netherlands, but diversify into New Energies. It also said it under-spent its 2017 capex and opex targets, and declared net income up 147% year on year in 4Q2017 at $3.8bn and up 184% for full year 2017 at $13bn.
Net income was swollen by proceeds from its $30bn divestment programme, of which $24bn now completed, with more than $6bn announced or in progress.
Thus, from its Integrated Gas business alone in 4Q2017 it completed the sale of its remaining Woodside shares for $2.635bn and gained $363mn from the sale of its 16.8% interest in Sao Paolo gas distributor Comgas. This week it flagged the sale of its stake in the offshore Thailand Bongkot gas field. In the same quarter, Shell’s upstream completed its $3.8bn North Sea asset sale to Chrysaor
On a current cost of supplies basis, Shell's full year 2017 earnings, excluding identified items, were $15.8bn, an increase of 119%, while those for 4Q2017 of $4.3bn were up 140% year on year.
CEO Ben van Beurden said Shell’s capital expenditure (capex) in 2017 at $24bn came in $1bn below its original $25bn target for that year, while operating expenditure of $38bn was some $2bn lower than its original 2017 $40bn target.
New field start-ups and the continuing ramp-up of existing fields, particularly of oilfields in Brazil, Kazakhstan. Malaysia and the US Gulf an additional 196,000 boe/d to production compared with 2016, which almost offset the impact of field declines and divestments.
Shell was awarded nine blocks in the Mexican bid round for deepwater Gulf of Mexico blocks January 31. “We were by far the most successful international oil company,” said van Beurden: “In 2025-30, we will need new elements in the [upstream] development funnel to sustain our cash flow, so thus this seven-year period is to backfill that work programme: Brazil will help, Mexico hopefully too.”
Full year 2017 oil and gas production was 3.66mn barrels of oil equivalent/day – 2.77mn boe/d from Upstream and 887,000 boe/d from Integrated Gas – similar to 2016 levels, with growth balanced out by divestments.
Upstream average production was 2.77mn boe/d in both 4Q and full year 2017, flat year on year, but down 7% in 4Q. Liquids output in 4Q2017 was 11% lower year on year at 1.54mn b/d, while natgas was down 2% to 7.15mn ft3/d (equivalent to 1.23mn boe/d). One-eighth (so 350,000 boe/d) of Shell’s 4Q2017 net production came from Brazil, much of it from former BG assets.
Integrated Gas sales were 981,000 boe/d in 4Q, up 8% year on year, and 887,000 boe/d in full year 2017 (flat year on year).
Also within Integrated Gas, LNG sales volumes were up 12% in 4Q2017 at 17.15mn metric tons, and up 16% in full year 2017 at 66mn mt. Net liquefaction volumes made up 8.15mn of that in 4Q2017 (down 1%), and 33.2mn mt in full year 2017 (up 8%). Higher volumes from Gorgon in Australia particularly boosted both numbers. CFO Jessica Uhl said that Integrated Gas alone made $5.3bn earnings in 2017, despite the partial 1H2017 shutdown of the Pearl 140,000 b/d gas-to-liquids plant in Qatar.
Asked about the medium-term LNG glut, van Beurden said: “It’s conspicuously absent at the moment, where we see a rather tight LNG market. China is very strong in both gas import growth, and stronger again in LNG demand.” Asked about the current ratio of indexation of Shell’s LNG sales to oil, versus other pricing benchmarks, Uhl replied: “Most is oil; 70%-80% is tied to oil.”
Uhl said Shell's shale portfolio already contributes 270,000 boe/d net but that this could double in five to ten years, noting that its portfolio extends beyond North America to also Vaca Muerta in Argentina.
At least one bank was impressed with Shell's results: upstream earnings of $1.65bn beat the consensus of $1.10bn m by 50%, according to analysts at Jefferies. Total production was 3.757mn b/d, in line with the bank’s estimate. Integrated gas earnings were $1.636bn, 8% above the consensus of $1.520bn. "Our investment thesis on Royal Dutch Shell is unchanged despite soft cash flow generation in 4Q17," they said. "We believe the growth in the deep water, shales and chemicals businesses will lead to cash-flow from operations in excess of $55bn by 2020. This growth, combined with strong capital discipline, will lead to free cash flow in excess of $25bn, a 10% yield based on the current market capitalisation."
Groningen issues
Shell’s conference call was occurring as Dutch mining inspectorate was issuing its non-binding advice to the government there that Groningen gas production, operated by Shell-Exxon joint venture NAM but with state-owned EBN as its partner, should be halved from its existing level.
However van Beurden commented on a controversy that flared up, after Dutch national newspaper Trouw earlier this week reported that Shell Nederland had issued a declaration to limit its liabilities to NAM. He insisted: “Both shareholders [Shell and Exxon] want to retain their stakes in NAM. NAM is very strong… I want to remove any thought that Shell would shirk its responsibility [to earthquake damage claimants]… NAM has a legal responsibility to contribute.”
A new settlement is being negotiated with the government on how these claims are settled, said the Shell CEO, and both Shell and Exxon and the government would pay into the scheme, which would be independently administered, not by NAM.
Shell’s results statement said, on the outlook for 1Q2018, that NAM production in the Netherlands is subject to decisions by the government following the January 2018 earthquake at Zeerijp.
On a brighter note, Shell also outlined planned capex of $1bn-$2bn/yr in New Energies out to to the end of this decade. The CEO said future investments could be in North Sea wind, and in additional North American renewable capacity. On Shell's entry into the UK gas and power retail market, he said Shell understood the challenges facing the UK power market: "They are challenges for the Big Six, not for challengers to the Big Six."
Asked by German newspaper Handelsblatt if that was too timid, van Beurden replied: “I’d struggle to quote another company that is investing – as a newcomer – up to $2bn a year.” He said the world needs to target a 40g carbon/megajoule (g/MJ) carbon intensity by 2050, and net zero by 2070, and the investment was part of Shell’s programme to halve its existing 80g/MJ sales portfolio by 2050. Asked by another German reporter if Shell plans to re-enter the Arctic, now that oil prices were improving, van Beurden said as regards Shell’s past Alaska drilling: “I think I made it clear: We are done offshore Alaska.”