The headlines about Shell’s 2017 full-year results were ever so rosy. Profits ‘jumped’, ‘surged’ or ‘doubled’, depending on who you asked. But earnings aren’t everything, and in this case, they’re not even the real story.
Of course commodity businesses make more money when their chosen commodity is dear: a barrel of finest Brent crude will currently set you back about $70, a far cry from the lows of $27 during the slump of 2015-16.
As the cost of getting the stuff out the ground stays the same, the top line price makes a pretty big difference. So yes, the full-year profit attributable to shareholders increased 183% to $13bn; while Q4 earnings, excluding identified items and on a constant cost of supply basis (i.e. the profit it would have made had oil and gas been at today's prices throughout the year), were up 140% to $4.3bn. Go figure.
Why the oil price has risen is an interesting story in itself*, but more interesting is how Shell has responded to the inevitable twists and turns of the market cycle.
CEO Ben van Beurden took the classic step of fixing the roof the when the rain was pouring. Figuring that the days of $100 oil were probably numbered, he’s attempted to focus the vast Shell machine on a) the activities it does best, such as deepwater exploration and extraction, and b) those activities that are less exposed to commodity swings, such as the burgeoning liquefied natural gas (LNG) market.
That’s what was behind Shell’s £35bn cash-and-shares acquisition of the LNG-heavy BG Group in 2016, and the otherwise counter-instinctive, simultaneous decision to shed $30bn in various ‘peripheral’ operations (it’s three-quarters of the way through, with the rest in progress) while imposing tighter cost discipline across the company.
So far, the latter decisions appear to have paid off: net debt has been reduced by $8bn (don’t get too excited – it still sits at $74bn) and underlying operating expenses dropped 2% despite oil volumes staying relatively flat. Cash flow – crucial to businesses big and small – reached a healthy $39bn, excluding working capital.
So while talk of surging profits may offer an inflated measure of van Beurden’s leadership because of the oil price rise, he still deserves credit because he’s strengthened the company’s fundamentals. Shell has earned the admiration of its peers – coming 8th in MT’s recent Britain’s Most Admired Company awards, which reflect the opinion of business leaders and independent analysts. It’s now trimmer and less exposed to the next cyclical oil price downturn, which will eventually, inevitably come when the frackers start drilling again. Then again, that’s harder to fit into a headline, isn’t it?
(*If you’re interested, the oil price fell because Chinese demand slowed and US frackers bumped up international supply. The recent recovery is due to a combination of the global economic uptick and the earlier impact of those low prices – deliberately exacerbated by OPEC keeping the taps on – throttling the frackers’ exploration pipelines. Isn't oil fun?)
Image credit: Shell