Easing Shell cash generation in focus

Shell’s assured showing

Shell joined rival oil majors in unveiling further assured progress in the third quarter, bringing above-forecast profits and still-buoyant cash generation. Whilst cash from operations was 11% lower at $7.58bn, the first such retreat in seven quarters, that reflected the effect of recent cost initiatives now materialising, and for a fifth consecutive quarter the dividend was covered from cash with a surplus. Investors will be relieved that recent fires at Shell refineries had little material impact on refining revenues.  Refining and trading was up 70% on a 9-month basis after a 32% rise year on year in Q2.

Note of caution

At the same time, although Shell’s cash generation initiatives can’t fairly be described as running out of steam, an undertone of caution on the gradient of its improving outlook was introduced by a number of negative operational and financial surprises. To be sure, these included easily absorbed one-off items totalling $387m. More importantly, negative working capital movements of $1.44bn against positive working capital of $941m in Q3 2016 will raise eyebrows. The size of the swing suggests it was unmanaged; as much of a surprise to the group as investors. Additionally, there was a production decline relative to the first half of the year at Shell’s gas-to-liquids conversion plant in Qatar. Whilst the outage happened almost a year ago, the pass through of disruption is one of a number of episodes at a cornerstone of the group’s massive LNG initiatives. A repeat could weigh on gas revenues.

Scrutiny

We think investor scrutiny of such kinks helps explain the mild rise of Shell’s shares on Thursday morning despite results being robust overall. It’s worth noting that the stock has advanced some 13% since mid-September. We interpret that lift as reflecting hopes that a resurgent oil prices would turn up the exponent of cash flow growth even higher after $40bn was made over the last four quarters. With cash from operations easing for the first time in around two years however, the chances of increased cash disbursement from surplus have been nixed.

Hence, a leaner and meaner Shell showed little cause for immediate concern during a successful quarter. On the other hand, the group joins its most comparable supermajor rivals Exxon and BP in a hesitant state. Production ramps are moderate against a price backdrop that remains uncertain. Today’s undertone of caution could be tomorrow’s concern unless the outlook pivots to a more positive state in the year ahead.

Technical chart

Shell’s technical chart reflects the orderly improvement of its price trend hand in hand with improved financial discipline. Only a brisk breach of recently established support at 2295p—formerly pronounced resistance at the start of the year will concern investors and possibly lead volatility to go up a notch.