Shell’s production conundrum

What's eating Shell investors?

A rebound in downstream profits has enabled the world’s No.2 supermajor to triple quarterly profits, whilst a surprisingly aggressive turn in cash generation should silence dividend mutterings for years.

Investors put out over output

So after an almost 250% surge in clean quarterly earnings to $3.6bn in the June quarter, what’s eating investors? Shell shares barely managed to stay aloft on Thursday.

Part of the answer lies across the channel, and some of it to the North. Smaller French rival Total SA announced on Thursday that it increased production by 3% to 2,500,000 barrels of oil equivalent (MBOE) in Q2. Relative ‘minnow’ Statoil in Norway said production rose 1.8% to 1,996 MBOE. These increases sound modest, but Shell’s production growth rate was still worse in Q2. It delivered 7.4% less hydrocarbon over the year, totalling 3,500 MBOE.

Some of the slide is down to OPEC supply limits. And to be sure, a c. 40% rise in downstream and petrochemicals earnings means the production slump is not an immediate cause for alarm. Continued balance sheet progress also looks assured after net debt was slashed by another $10bn, or 13% to $66bn, Integrated Gas profitability surged about 35% and divestments reaped $3.7bn.

Naturally, investors can’t have it both ways. Bolstered cash to insure future dividends mean lower production when assets are disposed of. The group also reiterated its plan to spend $25bn this year, so it’s not standing still. Production will still fall further before it stabilises though. Shell sees Q3 output sliding by another 240,000 as exits from some Malaysian and Australian projects and a U.S. JV feed through. That will be offset somewhat by the resumption of Pear GTL plant in Qatar.

Shell slips behind Exxon

Still, Investors will look at Shell’s 6% share price fall this year and Brent’s 11% rise, and wonder if setting production on cruise control at this point of the cycle is optimal. And such thinking might grow more pointed later this week, when arch rival Exxon unveils its own quarterly figures. Shell has been persistently outperforming the world’s biggest listed oil producer in terms of production growth for several quarters. Shell also aims to better Exxon on returns on equity, another way to edge its investment case.


It may be reflective of Shell’s incongruous state in Q2 that its stock price chart shows the shares trapped in a range so far this year, beneath clear resistance at 2191p. An approaching apex from the uptrend since June 2016 may also be a source of trepidation for bulls. Not all ascending triangles have a happy ending immediately after the breakout, albeit the event looks some weeks away. The stock’s general upward direction should provide reassurance, reducing the likelihood that a reversal is brewing. Tension is building though, particularly given low visibility on oil. Another smaller symmetrical triangulation that should culminate soon will offer the best clue as to whether the stock is ready to tackle 2191p resistance in the medium term. The smaller break out will need to head higher sharply to demonstrate good chances. Failure – including at major resistance – raises the probability of a bigger breakdown, even below the year-long rising trend.


Source: Thomson Reuters and City Index

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