Shell Warns of Weak Economic Outlook Despite Bumper Profit

(Bloomberg) --

Royal Dutch Shell Plc said the worsening economy could slow the pace of returns to shareholders, overshadowing a strong third-quarter trading performance that yielded bumper profits.

While the company comfortably beat even the highest analyst estimate for third-quarter profit, shares dropped the most in almost a month after Chief Executive Officer Ben van Beurden warned of uncertainty around the current pace of share buybacks and reduction in gearing -- Shell’s ratio of debt to equity.

It’s a performance that echoes Shell’s closest rival BP Plc, which also posted better-than-expected earnings but disappointed shareholders hoping for a dividend increase. The third quarter was difficult for energy producers, with crude prices sinking over worries about the impact of the U.S.-China trade war while natural gas markets endured a long stretch of oversupply.

“The prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback program within the 2020 timeframe,” van Beurden said in a statement on Thursday.

Shell’s B shares fell as much as 3.2% in London, the biggest drop since Oct. 2, and traded 2.6% lower at 2,262.5 pence as of 8:18 a.m. local time.

Shell said adjusted net income was $4.77 billion in the quarter, beating the average analyst estimate of $3.92 billion. That compares with profit of $5.62 billion in the same period last year, and improves on a surprisingly weak second quarter. Cash flow from operations including working capital, perhaps the single most important measure for Shell as it aims to distribute $125 billion to shareholders between 2021 and 2025, was $12.25 billion, little changed from a year earlier.

“Common sense suggests the balance sheet is much more important than an arbitrary target on the buyback, especially if the company plans to continue the buyback post 2020,” RBC analyst Biraj Borkhataria said in a note.

Trading Gains

The company’s downstream division, which includes refining, chemicals and fuel marketing, jumped 51% to $2.57 billion. The company emphasized the positive impact of trading gains, particularly in the market for fuel oil, which has been in flux ahead of the introduction of new rules limiting the sulfur content of shipping fuel.

While Shell and its peers are better known for their oil fields, refineries and fuel stations, they also run vast trading operations far larger than independent trading houses like Vitol Group or Glencore Plc. Shell trades about 13 million barrels of oil equivalent a day, nearly double the volume handled by Vitol.

Shell’s upstream output fell 2% in the quarter as a result of a hurricane and maintenance, as Shell produced 2.606 million barrels of oil equivalent a day. That doesn’t include production from the integrated gas unit, where output rose 4% to 957,000 barrels of oil equivalent and liquefied natural gas sales volumes increased 9% to 18.9 million tons.

Advance Warning

The company had warned in its first ever pre-earnings “quarterly update” that upstream production would probably dip slightly from a year earlier, though the impact of the decline may be offset by a strong performance in its market-leading liquefied natural gas trading business.

The company decided to disclose more information before publishing its results following complaints its earnings were too volatile to predict. In the first quarter of 2019, it beat analyst estimates by 14%, then missed them by 28% the following quarter.

Shell’s peers also made one-time disclosures this quarter to flag bearish news. BP Plc beat estimates on Tuesday but only after analysts downgraded them by about 35% after the company flagged a $2.61 billion impairment charge. Exxon Mobil Corp., which reports earnings on Friday, said it will take a $400 million to $700 million hit from lower oil prices.

--With assistance from Javier Blas and Christopher Sell.

To contact the reporter on this story: Kelly Gilblom in London at kgilblom@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Stuart Wallace

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