Cash flow arrests Shell momentum

Yet the moment Brent crude grazed $70 a barrel, as it has done several times this year already, expectations were liable to drift skyward. So, despite a near-tripling in net income and a 73 per cent jump in operating cash flow to $35.7bn (£25.1bn), the market received these results with a shrug. At issue was the latter metric, given fourth quarter operating cash flow softened due to steeper tax payments and increased cash requirements of the trading business.

Not so long ago, Shell’s board would have bitten off any hand that offered a plan to generate $7.28bn every three months. But lofty commitments to shareholder returns require lofty cash generation, particularly now the $30bn disposal programme is ending. That’s because new projects are expected to suck up between $25-$30bn annually for the next three years. Even after disposal proceeds of $5bn a year, operating cash flow needs to hit at least $40bn if Shell is to afford the $15bn cost of a scrip-free dividend.

Of course, this will all be possible if oil prices stay elevated. But shareholders should remember that there is more to higher energy prices than just supply and demand. The dollar has also taken a clobbering, a move evident not only in Shell’s falling dividend yield, but the 7 per cent fourth quarter increase in underlying operating expenses. Expect all eyes to be drawn to further evidence of a cost inflection point when first quarter earnings are published at the end of April.

Shell will need to spend if it is to keep on top of one traditional valuation metric: its reserves replacement ratio, which dropped to 27 per cent last year. Good news, potentially, was an announcement in advance of these numbers heralding a major discovery at the Whale deep-water well in the US Gulf of Mexico, although further appraisal drilling is needed to establish the field’s potential value.

The City expects adjusted pre-tax profit of $32.8bn and adjusted EPS of 231¢ in 2018, up from $20.9bn and 192¢ last year.