LNG prices push Shell profit to 30-month low

8/2/2019

Royal Dutch Shell’s second-quarter profit slumped to a 30-month low on weaker gas prices and refining margins, denting a steady recovery in recent years and sending the Anglo-Dutch energy company’s shares down 5%.

The results missed analyst forecasts by a wide margin and triggered the biggest one-day retreat in Shell shares in over three years. The company was the second-worst performer on London’s FTSE 100 index in morning trade.

Shell, the world’s No.2. traded energy company, joins rivals Total and Norway’s Equinor in reporting weak results for the quarter while BP reported stronger-than-expected profit.

Shell’s performance fell short of expectations across the board but was most pronounced at its flagship liquefied natural gas unit. The company also blamed a weaker global economic and trade environment for hurting its chemicals business.

“The general macro (environment) at this point in time of course is not supportive in a number of areas,” CEO Ben van Beurden told reporters.

Trade tensions between the United States and China are having “quite a dramatic reaction” on the petrochemical sector as demand for plastics in the world’s two largest economies sags, he added.

A rise in cash generation - a sign of improving operations - was the one bright spot in the company’s results.

VOLATILE EARNINGS

Net income attributable to shareholders in the quarter, based on current cost of supplies (CCS) and excluding identified items, dropped 25% to $3.6 billion from a year ago - the lowest since the end of 2016.

That was about 30% below the average estimate from analysts.

Shell’s debt pile rose to $66.5 billion by mid-year from $64.7 billion at the end of 2018, underscoring the strain from its dividend program - the world’s largest at over $15 billion - and $25 billion share buyback program.

“This set of earnings is weaker than most were looking for and were below expectations in all the main divisions,” Morgan Stanley analyst Martijn Rats told Reuters.

“Earnings remain hard to forecast and volatile.”

WEAK LNG

Shell’s LNG division, known as Integrated Gas, struggled the most - hurt by $479 million in impairment charges in Trinidad and Tobago and Australia as well as lower sales and weaker prices.

Asian LNG spot prices have more than halved since the start of the year, weighed down by soaring new production.

But Chief Financial Officer Jessica Uhl said Shell, the world’s top LNG trader, continues to forecast a strong long-term outlook for the market as demand picks up.

Oil and gas production in the quarter rose 4% from a year earlier to 3.58 million barrels of oil equivalent per day, but was down from 3.442 million boed in the first quarter of 2019.

Cash flow, a key measure for the Anglo-Dutch company, rose to $11 billion from $9.5 billion a year ago.

Free cash flow - cash available to pay for dividends and share buybacks - dropped to $6.9 bilion.

Shell has focused on cash generation as a key measure of growth, targeting free cash flow of $25 to $30 billion a year between 2019 and 2021 and as much as $35 billion by 2025.

Exxon Mobil and Chevron both report on Friday.

Additional reporting by Sabina Zawadzki, editing by Deepa Babington