Shell goes ex-growth

An ill-fit with previous guidance might prompt some to accuse Shell of jumping the gun. The half ended with gearing just below 24 per cent (on the company’s measure) – some way off a 20 per cent target, and then only with an assist from second-quarter disposal receipts of $4.9bn. Negative working capital movements, mostly confined to the downstream division, meant first half operating cash flow actually fell 9 per cent to $18.9bn, despite a 35 per cent year-on-year jump in the average realised oil price to $63.38 a barrel. Include the buyback commitments, and cash flow does not quite stretch to cover debt repayments, cash dividends and the bottom rung of the capital expenditure programme. Not yet, anyway.

The negative share price reaction to these results suggested investors were one with analysts in their hopes for the first half. Shell might have expected a bit more forgiveness. Exclude the $2.1bn working capital pressure, and the three months to June were the most cash generative since the start of 2014, when a barrel of Brent crude sold for more than $100.

The ensuing years have also seen a re-set in the industry’s engagement with shareholders. Hence the reason (and justification) we have long-suspected for the buyback; Shell might be happy with its current portfolio, but the decision to spend the equivalent of 13 per cent of its equity on its own shares points to some doubt over its investment options. Oil majors can no longer commission multi-decade projects with anything like the certainty they once possessed.

Analysts are looking for adjusted pre-tax profits of $37.3bn and EPS of $2.82 this year, rising to $39.6bn and $3.17 in 2019.