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Royal Dutch Shell: Follow The Cash Flow Story And You’ll Find The Way

Nov. 12, 2018 11:13 AM ET


  • The European Oil sector has demonstrated an impressive capital discipline, with renewed focused on cash earnings.
  • Royal Dutch Shell is an exceptional cash generating machine that has recently released the best quarterly results in the company’s history.
  • The muted share response to the earnings report creates a wonderful entry point to an unloved sector.

My high conviction investment thesis in Royal Dutch Shell (RDS.B) is based on three success pillars. The first pillar is growth in net income, accompanied by a significant rise in free cash flow. The second pillar is shareholder friendliness, or how Shell treats its shareholders well. The third pillar, as in with every investment, is the current compelling valuation of shares

Responsible, Consistent Growth

In the third quarter, Shell generated adjusted net income in the amount of $5.6 billion, up a whopping 37 percent compared to the third quarter of last year. Earnings were 70 cents a share, up 40 percent year over year. More importantly, the company’s growth is well balanced between its different divisions. The upstream division (oil exploration) generated adjusted net income of1.88$ billion, compared to a meager 562$ million during the third quarter of 2017.

The company’s integrated gas division (gas exploration and LNG) recorded $2.3 billion in net income, almost double the net income recorded during same quarter last year. But Shell doesn’t only grow its net income. It also generates free cash flow at a rapid clip. In the most recent quarter, Shell generated free cash flow of $14.7 billion during the most recent quarter. This marks the most profitable quarter, in terms of cash generation, in the history of Shell. In fact, Shell is more cash flow generative today than it was back in the wild days of 2014, when the price of oil was hovering above $115 per barrel. Pretty amazing, isn’t it?

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