Royal Dutch Shell plc took the opportunity to pay down its heavy debt burden as profit surged by more than expected in the first quarter.
The energy giant became the latest oil major to restore earnings to pre-pandemic levels, thanks to a sharp recovery in the prices of crude, natural gas and chemicals.
As the industry recovers, investors are demanding higher returns and Shell took another step toward giving them what they want. After slashing its dividend last year, the company went ahead with a planned four per cent increase to the payout. It also managed to pay off $4.1 billion of net debt, moving closer to the level of borrowing that will allow it return extra cash to shareholders.
“Shell has made a strong start to 2021,” chief executive officer Ben van Beurden said in a statement on Thursday. “We have reduced net debt by more than $4 billion this quarter, progressing towards the $65 billion milestone to increase shareholder distributions.”
While the Anglo-Dutch company made progress on debt, its liabilities were $71.25 billion at the end of March, putting gearing – the ratio of net debt to equity – at 29.9 per cent. If the company were to continue reducing its borrowings at the current rate, it would reach its target in the third quarter.
“The group is well on track to reduce net debt and start additional returns to investors later in the year,” Barclays Bank Plc said in a note. Shell’s B shares rose 1.9 per cent to 1,343 pence as of 9:28 a.m. in London.
Shell’s first-quarter adjusted net income was $3.23 billion, up from $2.86 billion a year earlier and beating the average analyst estimate of $3.06 billion. It joined Total SE, BP plc and Equinor ASA in reporting the highest earnings since 2019.
The results come two days after BP posted a much higher profit than expected and started share buybacks, thanks in large part to “exceptional” earnings from natural gas trading related to the big freeze in Texas.
Shell said its gas trading results were lower in the first quarter, but the company’s chemicals business really shone. That’s an area where Shell – and its U.S. peer Exxon Mobil Corp. which reports earnings on Friday – really excels. Prices for the products are rising strongly around the world with the rebound in the manufacturing industry.
The chemicals unit delivered $730 million in adjusted net income. That was about a quarter of the company’s total first-quarter earnings, even as shutdowns from the winter storms in Texas reduced overall utilization of its plants to 79 per cent from 84 per cent a year earlier.
Shell’s cash flow from operations was $8.29 billion, down from $14.9 billion a year earlier. The company had already flagged that the crucial metric, which underpins distributions to shareholders, would be weaker due to a $4.4 billion swing in working capital.
© 2021 Bloomberg L.P.