Why Shell Stock Fell despite Earnings Beat

Shell stock performance

Royal Dutch Shell (RDS.A) announced its earnings on April 26 before the market opened. The stock opened at $69.8 per share, lower than the previous close of $71.1. Eventually, Shell stock closed at $70.3, around 1.1% lower than the previous day’s close. This performance is quite contrary to the broader market indicator, which rose on the day. Also, crude oil prices rose, and Shell’s peers ExxonMobil (XOM), Chevron (CVX), and BP (BP) rose.

Why Shell Stock Fell despite Earnings Beat

The broader market indicator, the SPDR S&P 500 ETF (SPY), rose 0.2% on April 26. WTI prices rose 1.0%. XOM, CVX, and BP rose 1.7%, 1.2%, and 1.5%, respectively. Other peers Total (TOT), Statoil (STO), and Petrobras (PBR) rose 1.4%, 4.1%, and 4.1%, respectively.

Why the decline in Shell stock despite the earnings beat?

Shell’s earnings beat estimates in 1Q18. However, Shell’s cash flow from operating activities declined 1% YoY to $9.4 billion in 1Q18. Also, Shell’s cash flows were lower than Wall Street analysts’ expectations.

In 1Q18, Shell’s year-over-year higher earnings didn’t translate into higher cash flows due to increased tax payments, led by settlements of cases, audits, and higher earnings. Also, in the integrated gas segment, Shell witnessed an increase in cash margining on derivatives, which affected its cash flows.

Jessica Uhl, Shell’s CFO, stated during the 1Q18 results webcast, “As we said in Q4 2017, our risk management strategy in Integrated Gas includes the use of some commodity derivatives. A component of this strategy is to lock in the economic value of the difference between Henry Hub and Brent – an exposure that is difficult to manage or diversify otherwise. These are not speculative positions…they are linked to price exposure from physical deliveries.”

So lower-than-expected cash flows despite robust earnings could have pressured Shell’s stock.

In the next part of this series, we’ll look at analyst ratings for Shell after 1Q18 earnings.