Shell Back in Black in Q3 (Update)

(Adds comments from press briefing)

Shell reported net income of $489mn in the third quarter October 29, marking a reversal from a $18.1bn loss in the previous three months but far less than the $5.88bn it generated in Q3 2019. But CEO Ben van Beurden told a press briefing that the company's quarter-on-quarter growth reflected the strength of the company's assets.

Current cost of supply (CCS) earnings, which exclude identified items such as impairments, totalled $955mn, up from $638mn in Q2 2020 but down from $4.77bn in Q3 2019. Cash flow from operating activities stayed strong, coming to $10.4bn, versus $2.56bn in Q2 2020 and $12.3bn in Q3 2019. Free cash flow was similarly resilient, reaching $7.57bn in the three-month period, compared to $243mn in Q2 2020 and $10.1bn in Q3 2019.

"Our sector-leading cash flows will enable us to grow our business of the future while increasing shareholder distributions, making us a compelling investment case," van Beurden said in a company statement. "We must continue to strengthen the financial resilience of our portfolio as we make the transition to become a net-zero emissions energy business.

"The strength of our performance gives us the confidence to lay out our strategic direction, resume dividend growth and to provide clarity on the cash allocation framework, with clear parameters to increase shareholder distributions," he continued.

Shell's numbers were weaker year on year due to lower oil and LNG prices that reflected the delay in oil indexation against which most of its LNG is sold. It also saw slimmer refining margins and reduced production. Output available for sale averaged 3.08mn barrels of oil equivalent/day in the quarter, down from 3.38mn boe/d in the previous three months and 3.56mn boe/d in the corresponding period in 2019.

Its premium fuels and lubricants as well as its filling stations and convenience shops were strong points, van Beurden told journalists. And with 30mn customers daily the company is also uniquely able to understand consumer behaviour, he said. The company is also expecting growth from its chemicals business as the world's population grows. But LNG is key with regard to the energy transition; so too is its integrated power business which is focused on customers' demands for low-carbon reliable energy. "We will build, grow and capitalise on our strengths," he said.

But he ruled out more greenfield gas-to-liquids projects, perhaps reflecting the poor economics at today's low oil price, the huge upfront costs in a capital-constrained age; and mounting competition from LNG in the heavy goods vehicle sector. He also ruled out major acquisitions in US shale assets.

The company, which might never again produce as much oil in a year as it did in 2019, is planning to high-grade and simplify its portfolio and would provide more details at its February investor day, he said.

The company booked a $1.1bn impairment charge in the three months, which was far less than the $16.8bn in charges it incurred in the second quarter after slashing its medium to long-term price forecasts.  The latest charges were partly offset by $0.5bn in gains on the fair value accounting of commodity derivatives. Its delayed and malfunctioning Prelude LNG project accounted for $1bn of impairments in the quarter.

Shell's integrated gas business achieved $768mn in adjusted earnings, recovering from $362mn in Q2 2020 but down 71% from the $2.68bn generated in Q3 2019. Its upstream segment suffered a $884mn adjusted loss, narrowed from a $1.51bn loss in Q2 2020 but comparing with a $833mn gain in Q3 2019. The company's oil product business performed surprisingly well, generating $1.68bn in adjusted earnings versus $2.41bn in Q2 2020 and $2bn in Q3 2019.

Shell slashed its dividends in April for the first time since the Second World War, by around two thirds. The company said in its Q3 results it would increase its dividend for the quarter by 4%, and hoped to raise it on an annual basis moving forward. The company's mantra is to be a first-class investment case with AA credit rating.

The aim first is to reduce debt to $65bn, van Beurden said and then start total shareholder distributions of 20-30% of cash flow from operations. Debt stood at $73.5bn at the end of Q3 following a $4bn repayment from $7.6bn free cash flow.