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How Does Shell’s Liquidity Position Look?

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Shell’s cash flow

In the first nine months of 2018, Royal Dutch Shell’s (RDS.A) cash flow from operations stood at $31.1 billion, which rose 9% YoY due to better earnings. Shell’s cash outflow from investing rose 13% YoY to $8.4 billion in the first nine months. Further, Shell’s cash outflows from financing (including currency translation differences) rose by 23% YoY to $23.9 billion in the first nine months due to interest, debt, dividends, and share repurchase outflows.

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Did Shell have a cash flow surplus or shortfall?

In the first nine months, Shell generated $31.1 billion in cash from operations but had a capital expenditure cash outflow of $15.9 billion and dividend outflows of $11.8 billion, which totaled $27.7 billion of cash outflow. So, after expensing for capex and dividends, Shell’s cash flow from operations was at a surplus of $3.4 billion (the difference between cash inflow of $31.1 billion and outflows of $27.7 billion).

In comparison, ExxonMobil (XOM) and Chevron (CVX) had cash flow surpluses in the first nine months. However, BP (BP) had a marginal cash flow shortfall in the first nine months. Further, Shell had divestment proceeds of $3.5 billion in the first nine months. The company utilized the cash flow surplus, divestment proceeds, and cash reserves to repay a portion of its debt in the first nine months. Thus, Shell’s cash balance fell marginally from $20.3 billion at the beginning of the first nine months of the year to $19.1 billion at the end of the first nine months.

What does Shell’s cash flow analysis imply?

In the first nine months, Shell generated a cash flow surplus, which is a positive sign. Also, the company could repay debt partially, another good sign. The company’s surplus position could continue in the future due to its disciplined cost and capital approach and focus on core competitive assets.

Further, Shell’s surplus cash flow is also a likely reason why the company could progress with its buybacks. Shell announced the second tranche of its $25 billion share buyback program. The company is expected to buy around $2.5 billion worth of shares until January 28, 2019. The first tranche of $2.0 billion was completed in October 2018. The buybacks indicate Shell’s intentions to share the benefits of higher oil prices, earnings, and cash flows with shareholders.

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