Cashed-up Shell to ride out storm

Price realisations were down by around a quarter in the final three months of 2014, and the fall will be far more pronounced in the early part of this year. The group’s fast-rising gas and LNG output provides a degree of insulation as prices are generally fixed by long-term contracts. But cash flows will undoubtedly be under pressure through 2015.

More worryingly, Shell revealed a fall in its reserves replacement ratio, which provides an indication of a company’s ability to replenish its oil and gas reserves. Last year’s three-year average adjusted rate came in at 112 per cent, but this has subsequently fallen to 85 per cent. With a sharp pull-back in capital expenditure now a strategic priority for the group, it’s conceivable that Shell will find it more difficult to achieve a sustainable long-term rate.

Nonetheless, last year was still reasonably successful on the exploration front, with 10 material discoveries in frontier/heartland basins, and a further 41 near-field discoveries. During the period, Shell also successfully integrated the LNG portfolio purchased from Spain’s Repsol.

The focus is now squarely on capital discipline. Shell’s chief executive Ben van Beurden said the group was “being careful not to over-react to the recent fall in oil prices”. But he also revealed that Shell is planning to cut a further $15bn in capital expenditure over the next three years. In all, Shell reduced capital expenditure by around $9bn last year, and hived-off $15bn of assets. As a consequence, the group generated free cash flow of $25bn in 2014, compared to zero in the previous year. That was enough to cover the group’s dividend and share buy-back commitments, while doubling the group’s cash resources to $21bn.

Prior to these figures JPMorgan Cazenove anticipated adjusted 2015 EPS of $2.54