Interactive Investor

Shell embraces "lower forever" oil prices

27th July 2017 16:44

Graeme Evans from interactive investor

The reshaping of Royal Dutch Shell after its acquisition of BG Group looked to be making progress Thursday after an impressive set of second-quarter results.

As ever, the oil price had a big part to play in the energy giant's performance. The Anglo-Dutch company comfortably smashed City forecasts with a surplus for the period of $3.6 billion (£2.75 billion), compared with the $1 billion recorded a year earlier when oil and gas prices were much lower.

Significantly, a downturn in the oil market's fortunes over recent months meant the Q2 figure was slightly lower than the first-quarter return.

But oil prices aside, UBS analyst Jon Rigby said it had been another good quarter from Royal Dutch Shell, emphasising "much greater consistency of delivery".

The broker has a 'buy' rating and price target of 2,550p, which reflects a modest premium to peers BP and Total due to Shell's "portfolio advantage".

He noted an outperformance in upstream operations, where profits of $339 million were much better than the consensus of $238 million. Within the downstream arm, which includes refining and petrochemical operations, earnings from oil products were higher than expected.

The strong cash flow performance has helped Royal Dutch Shell to deal with the debt pile built up in the wake of the £35 billion acquisition of BG Group in the first half of 2016.

Net debt stood at $66 billion, down almost $9 billion on a year ago, after the group continued its programme of divestments with disposals worth more than $6.6 billion in the quarter.

Chief executive Ben van Beurden said Shell would continue to maintain its disciplined approach, with a focus on capital efficiency, costs, new project delivery, and divestments.

Over the past 12 months, he said cash flow from operations of $38 billion had covered the cash dividend and reduced gearing to 25%.

The results of Shell and other companies in the sector highlight that the industry is finally coming to terms with an era of oil prices at around $50 a barrel.

In fact, van Beurden has indicated that Shell is braced for the oil price environment to be "lower forever". The company is also said to be working on plans to increase its participation in renewables and green energy, particularly in light of Britain and France's pledge to stop the sale of internal combustion vehicles by 2040.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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