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Royal Dutch Shell: Q4 Earnings Results Show Reasons For Caution

8 FEB 2018

Summary

Analysts and the financial media were very excited about Royal Dutch Shell’s Q4 2017 results, but there is a lot to be concerned about here.

The company divested more than 250kboe/day in producing assets, which juiced its net income but hurt total production.

The company’s three-year RRR is only 78% with an 8.9-year reserve life. This needs to be corrected quickly if the company is to survive.

Royal Dutch Shell failed to generate sufficient cash to pay its shareholder distributions over the past few years but finally appears to have corrected this problem.

If the company can deliver on its promises going forward and corrects the reserve depletion problem then it could be a good buy here, but investors should be very cautious.

On Thursday, February 1, 2018, oil and gas supermajor Royal Dutch Shell (RDS.A)(RDS.B) reported its fourth quarter 2017 earnings results. As might be expected, the company improved upon its year-ago results, primarily due to higher commodity prices. This allowed Royal Dutch Shell to greatly improve its financial position, including the retirement of approximately $8 billion in debt over the course of the year. However, there were also a few things in the report that should be quite concerning to investors so we should not celebrate the strong financial performance too much.

As my long-time readers are no doubt already well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights serve to provide background for the remainder of the article as well as provide a background for the resultant analysis. Therefore, here are the highlights from Royal Dutch Shell’s fourth quarter 2017 earnings results:

  • Royal Dutch Shell reported total revenues of $85.422 billion in the fourth quarter of 2017. This represents a 31.9% increase over the prior year quarter.
  • The company produced an average of 3.756 million barrels of oil equivalent per day in the fourth quarter of 2017. This compares rather unfavorably to the 3.905 million barrels of oil equivalent per day average that the company had in the fourth quarter of 2016.
  • Royal Dutch Shell had average realized prices of $55.28/barrel and $4.40/kscf for liquids and gas respectively. This compares to $44.54/barrel and $4.03/kscf in the fourth quarter of 2016.
  • The company had a net income of $3.807 billion in the fourth quarter of 2017. This represents a 147% increase over the $1.541 billion that the company earned in the year-ago quarter.
  • Royal Dutch Shell maintained its quarterly dividend at $0.47 per common share or $0.94 per ADS.

FULL ARTICLE WITH 4 MORE PAGES

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