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Shell: a big year ahead

After digesting a negative working capital movement, investors warmed to the oil major’s strong third-quarter numbers
November 3, 2017

The market is starting to place big hopes in big oil. For those keen to understand why, Royal Dutch Shell (RDSB) gave a solid answer this week when it became the last supermajor to report third-quarter earnings. At the risk of oversimplification, the headline-winning, bull-rousing statistic is as follows: despite an average crude price of $51 (£39) a barrel, Shell has generated enough reported cash flow in the last four quarters to cover its $23bn capital expenditure and $15bn cash dividend. The long journey to the minimal thresholds for financial stability may be nearing its end.

IC TIP: Buy at 2,489p

As with BP (BP.), investors have stacked this sea change in operational discipline next to an apparently tightening oil market, and now expect boom time for the bottom line. What’s more, the re-rating in Shell shares has even started to push the dividend yield into something approaching normality, though a pay-rate of 6 per cent still suggests investors have their doubts.

Indeed, “big hopes” within equity markets is unfortunately synonymous with short-termism. Shell has closely tracked crude prices in 2017, meaning any dip in Brent back below $60 a barrel will probably blunt the recent rally in the oil major’s shares. Then again, assuming the company can keep a lid on operating costs – which after nine months are 10 per cent down on the same point in 2016 – full-year profit should look strong.

On the subject of outgoings, Shell’s capital expenditure looks light at just $17.2bn. That leaves $7.8bn of capital to be earmarked for fresh projects before January, during which time investors will also hope to see a $2.5bn negative working capital movement ironed out. That explains the somewhat lacklustre showing from clean operating cash flow, and the pause in de-leveraging. Given the company’s signals to date, we anticipate net debt - up $1.3bn since June at $67.7bn - to come down by the year-end.

Following these numbers, Panmure Gordon upgraded its full-year per-share earnings forecast from $1.65 to $1.91, rising to $2.01 in 2018.