Shell Is Gaining Financial Muscle via Strict Discipline


Jun. 21 2019, Updated 10:14 a.m. ET

Shell’s debt position

Royal Dutch Shell (RDS.A) has the third-highest debt percentage in its capital structure after BP (BP) and Total (TOT). In the first quarter, Shell’s total debt-to-capital ratio stood at 32%, whereas BP’s and Total’s ratios stood at 43% and 33%, respectively.

Shell’s net debt-to-EBITDA ratio fell from 1.5x in the first quarter of 2018 to 1.2x in the first quarter of 2019. BP’s and Total’s net debt-to-adjusted EBITDA ratios stood at 1.5x and 0.9x, respectively, in the quarter.

Shell’s net debt-to-EBITDA ratio has declined in the past four quarters, indicating the company’s improving debt position. Shell has consistently stayed focused on its first cash priority of debt reduction.

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Cash flows

In the first quarter of 2019, Shell’s cash flow from operations of $8.6 billion fell $0.4 billion short of covering its combined capex and dividend outflows. BP saw a $1.6 billion shortfall in the quarter, while Total saw a $0.9 billion shortfall in the quarter.

However, Shell had enough cash reserves to fund the shortfall. The company’s cash flows could soon turn to a surplus due to its strict cost and capital strategy and focus on its core competitive assets. Perhaps Shell’s higher cash reserves motivated the company to continue its share buyback plan.

Earnings growth in 2020

Shell is expected to post a 17% rise in its EPS in 2020. Shell has a robust integrated earnings model with competitive assets. The company’s strategy to reduce costs, optimize capex, sell noncore assets, and deliver new projects on schedule and within budget is expected to support its earnings growth. Also, Shell’s robust upstream and strategic downstream portfolios are expected to boost its earnings.


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