Shell announces $25bn buyback plan, despite profit falling short of expectations
The energy producer is to buy $2bn worth of shares a quarter in a move that should soothe investors and signal recovery after a three-year slump
London — Royal Dutch Shell finally gave investors the share buybacks they have been demanding, even as profit fell short of expectations despite resurgent crude prices.
The Anglo-Dutch energy producer said on Thursday that it is starting a $25bn share-repurchase programme, initially buying up $2bn of stock over three months. That should soothe investors who have grown increasingly anxious about when they’ll see the reward for sticking with Shell through the biggest oil-industry downturn in a generation.
It wasn’t all good news, as adjusted net income for the second quarter of $4.69bn fell short of even the lowest analyst estimate. Its peers Equinor and Total nearly matched or exceeded profit expectations.
Shell’s management resisted starting buybacks in the first quarter, saying its priority was paying down debt that ballooned after the more than $50bn acquisition of BG Group in 2016. Since then, crude has risen to a three-year high, cash flow has surged, and the company has made further progress in paying down its borrowings.
"Cash flow is what’s critical here," said Oswald Clint, an analyst at Sanford C Bernstein. "It’s just confirming the strength of the integrated Shell-BG business."
Cash flow for the quarter reached $11.6bn, excluding working capital movements, the highest since 2014 when crude averaged more than $100 a barrel, Shell CEO Ben van Beurden said in a Bloomberg Television interview.
Still, shares fell immediately after the market open and continued to decline as Van Beurden and CFO Jessica Uhl explained in a call with reporters that much of the earnings miss was largely due to one-time issues, such as the rapid strengthening of the dollar against the Brazilian real in the quarter. Uhl also blamed the opacity of the trading business for the difference between estimates and income.
"We had, overall, a very good quarter. That said, there were different expectations on the earnings side," she said, adding that currency moves "had a real impact that can be difficult to anticipate and model".
Additional questions arose about the structure of the buyback programme. Though it will vary quarter by quarter, according to Uhl, some thought it would have a stronger start. Christyan Malek, an analyst at JPMorgan Chase, estimated the company would complete $8bn of buybacks in the second half of 2018. This would require Shell to repurchase $6bn worth of shares between October and December, triple the current pace.
Shell B shares in London fell 3% to 2,644p at 10.28am in London. Equinor dropped 1.4% in Oslo, while Total rose 1.6% in Paris.
Now the question of buybacks has been answered, investors will also be keenly watching for any indication from management about how Shell will spend surplus cash. After years of selling assets, the company has signaled a desire to return to growth mode.
A rush of activity in north-western Canada has increased speculation that Shell could give the go-ahead for a $30bn liquefied natural gas (LNG) project this year. The company is also said to have bid, with a partner, for BHP’s US onshore oil and gas business, which could be worth about $9bn.
Shell’s total oil and gas production fell 7% in the second quarter, compared to a year earlier, to 2.488-million barrels of oil equivalent a day, mainly due to asset sales. The company predicted a further reduction in output this quarter, partly as a result of higher maintenance.