- Sales volumes grow during Q3
- Record operating cash generation
Reuters recently reported that BP’s (BP.) trading arm made at least $500m (£362m) in the three months to September, while Norway’s Equinor (NY:EQNR) has posted its strongest quarterly result in nine years. Booming natural gas prices are driving earnings and cash flows across the sector, so shareholders of Royal Dutch Shell (RDSB) would have been less than impressed with the supermajor’s failure to meet consensus estimates for the quarter.
The Anglo-Dutch group posted adjusted earnings of $4.1bn in the third quarter (Q3), down from $5.5bn in the prior three months, although management had previously issued a note to investors stating that Hurricane Ida would have a negative impact amounting to $400m. There was a reduced contribution from trading month-on-month, while overall production fell by 8 per cent to 2.08m barrels of oil per day. No details were forthcoming on maintenance outages through the period.
The group held its quarterly pay rate at 24¢ per share, but the good news for investors is that a 41 per cent increase in gas prices from the prior quarter has generated record operating cash flows despite a fall-away in LNG sales volumes. Free cash flow came in at $12.2bn, against $9.7bn in the three months to June, while net debt at $57.5bn is down by 22 per cent on the corresponding period in 2020. The group will be distributing billions to shareholders following the sale of its Permian assets, but given the remedial work on the balance sheet and near-term expectations for energy prices, it would be hard to imagine that management would not be considering another dividend increase.
Ben van Beurden and his boardroom colleagues may have other matters to consider, though, after billionaire activist investor Dan Loeb chose the day prior to the Q3 update to call for a break-up of the energy giant. It has been reported that Loeb’s hedge fund, Third Point, has taken a strategic stake in the group, so we can assume that this was just the opening salvo.
Shell is in good company on this front. Loeb has previously taken aim at other corporate heavyweights including Sony (US:SONY) and Sotheby's, but he certainly isn’t the first person to make a sum-of-the-parts argument in relation to an integrated oil company. A decade ago, some of BP’s biggest shareholders were pressing the oil giant to initiate a split of its refining and marketing operations, in addition to liquidating other assets. The assessment was that BP’s assets were worth far more than its market cap, largely due to negative sentiment brought about by the Deepwater Horizon disaster.
Shell was trading at a discount to its net asset value at the time of its last full-year results, although that is no longer the case. Loeb’s main beef seems to be that it is impossible to reconcile the group’s plans to run a renewables arm alongside its legacy business. It is easy to understand his point on the matter, but much depends on whether management is sincere in its desire to head for net-zero by 2050. After all, earlier this year activist fund Sarasin & Partners brought the environmental pledges of both UK energy majors into question, suggesting that investors were at risk through stranded assets.
They might eventually be at risk of hypothermia if any of the hot air generated at the 26th UN Climate Change Conference (COP26) leads to a long-term upward trend in gas prices. Hub prices always wax and wane, but it is ironic that gas imports for places such as Germany and California have increased as more and more of their grids have been given over to renewables and are, therefore, more exposed to intermittent supply. Despite efforts to assuage demands from the green lobby, bosses at Shell won’t be too worried if the cash keeps on rolling in on the back of rising energy prices.
