The investment thesis for Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B)radically changed back in 2015, when the company acquired BG Group. The idea of combining these two companies held a lot of promise, but investors would only benefit if management could successfully integrate the company, divest itself of some lower-return businesses, and lower the debt load it took on to get the deal done.

It wasn’t an easy task, but Shell’s most recent couple of earnings reports suggest that management has pulled it off. Here’s a look at its latest earnings release and what management has done recently to get the company one step closer to realizing the potential of that investment thesis laid out a couple of years ago.

Royal Dutch Shell has put together a streak of three consecutive quarters of impressive earnings results. The earnings results are decent, but not necessarily anything worth writing home about. The thing that is worth paying attention to is the company’s strong cash-flow generation over the past several quarters. This was the third time in a row where cash from operations more than covered the company’s capital spending and its cash dividend needs. This most recent quarter’s results also include a $2 billion build in working capital. As the company draws that capital down throughout the year, those cash-flow numbers should improve.

As is the case with just about every quarter, there are some identified items and adjustments the company makes to its separate business segments. This quarter, those one-time gains and losses more or less canceled each other out.

Looking at the company’s segment results, the two big drivers this quarter were upstream production and chemical manufacturing. Higher oil and gas prices increased the upstream results in both Europe and Asia, but the company continues to struggle with profitability in its North American segment, which contributed 734,000 barrels of oil equivalent per day of production. This is probably the one sore spot in this rather impressive earnings report.

The other segment that’s shows a lot of promise lately is Shell’s Chemical division. Shell and several other integrated oil and gas companies have been rushing into petrochemical manufacturing as of late because of the high per-barrel margins, steady cash flows, and lately, the advantage of using cheap natural gas in North America as a feedstock.

Today, Shell has 3.1 million tons of new petrochemical facilities under construction, which will increase its total chemical manufacturing footprint by 68%. The highlight of those projects is a 1.5 million ton per year ethylene and propylene facility Shell plans to build in Pennsylvania to take advantage of cheap gas from the Marcellus and Utica shale formations.

Shell’s $5.1 billion in free cash flow was more than enough to cover its dividend for the quarter. Keep in mind, though, that the company has a scrip dividend program, which reduces cash needs to cover the dividend. About $1.2 billion of Shells’ $3.9 billion in dividends was paid in new shares.

With the excess cash, the company continues to prioritize debt reduction. It paid down another $1.3 billion in debt this quarter to lower its net debt to capital ratio to 27.2%.

Everything must go!

Aside from Shell’s operational performance, the most notable thing about this past quarter was the incredible amount of asset divestments it announced. Since the beginning of the year, management has signed agreements to sell $15.7 billion in assets. The largest of these sales was $7.25 billion worth of oil sands assets in Canada, $3.0 billion for a package of its U.K. North Sea production facilities, and $2.2 billion for its 50% stake in its joint venture refining assets in the U.S.

Management said it wanted to do $30 billion in asset sales between 2016 and 2018 to readjust its portfolio post-BG Group merger and to pay down debt. The suite of sales it recently announced and the $5 billion in sales in 2016 mean that it is already at $20.7 billion through the first half of the year.

What management had to say

CFO Jessica Uhl commented on the company’s priorities for its newfound free cash flow:

Shell’s financial framework is a key element of our overall strategy. There is no change to the priorities for cash flow. Reducing debt. Paying dividends and turning off the scrip, followed by a balance of capital investment and share buy-backs. We are working four performance levers to manage the financial framework: divestments, capex, opex and new projects. These levers are adding significantly to cash flow. We are demonstrating good delivery against these levers and I want to further strengthen the momentum, with a strong focus on performance management, simplicity and costs. Fundamentally, this is an important opportunity to improve Shell’s competitive performance, irrespective of oil prices. This is about transforming the company for the future, more value and bottom-line focused and nimbler to drive change and improvement across the business. Debt reduced end Q1 2017 from Q4 levels and our net debt position at the end of Q1 17 was $72 billion. Despite no material divestment proceeds this quarter we have reduced our debt levels and gearing at the end of the quarter was 27.2%.

What a Fool believes

You have to give Shell some credit, here. Not only is the company performing well on the operations front, but its divestment program is going much faster than expected. If it can get these asset sales done and pay down its debt load faster, that means it will be able to start putting that free cash flow to work on other things like buying back shares, or even increasing its current payout.

Shell was never well known for being a company that generates high returns, but it looks as though CEO Ben Van Beurden’s strategy is setting Shell up well to do just that.

Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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