Has Royal Dutch Shell Risen To The Head Of The Class?

Nov. 08, 2018 5:06 AM ETShell plc (SHEL)BP, CVX, TTE, XOM111 Comments
Ray Merola profile picture
Ray Merola


  • Royal Dutch Shell reported 3Q 2018 earnings; management emphasized enormous cash flow, operational success, and rapidly improving metrics.
  • How do these results stack up versus Super Major peers?
  • Are RDS shares cheap or dear?

On November 1, Royal Dutch Shell (RDS.A) (RDS.B) reported earnings. Results continued to build upon the last several quarters. Strong earnings, cash flow, free cash flow, RoACE (Return on Average Capital Employed), gearing (a derivative of net debt-to-equity), and operational excellence were exhibited.

In this article, we will do a quick rundown on 3Q 2018 and YTD high points; most investors can validate this by reviewing the earnings release materials for that. As an important adjunct, we will compare Shell's results with Super Major peers Exxon Mobil (XOM), Chevron (CVX), BP PLC (BP), and Total SA (TOT).

RDS Results Continue to Track Management's Promises


Several quarters earlier, Shell management laid out its objectives, and now is delivering on these objectives. In a nutshell, here's the scorecard:Shell Financial Frameworksource: RDS 3Q 2018 earnings slideshow presentation

Cash Generation: The company owns a clear directive to emphasize cash flow / free cash flow. Four-quarters' rolling operating cash flow reached $38.3 billion, while corresponding free cash flow topped $29.3 billion.

Certain non-core assets are being sold off. By the end of 2018, Shell will complete its promised 3-year, $30 billion divestiture program. Currently, more than $30 billion asset sales have been completed or announced. $27 billion is in the hopper.

Readers notes:

I take minor exception with the way Shell management calculates free cash flow. For example, in 3Q 2018, the company reported $8.0 billion FCF. This was determined by subtracting net cash from all investing activities from operating cash flow. I prefer to subtract capital expenditures and add back interest only. Asset sale proceeds is a non-core cash flow item; such proceeds were earmarked for debt reduction.

Using this methodology, 3Q 2018 FCF was $6.8 billion, and $22.7 billion for four-quarters' rolling.

Either way, quarterly or 4-quarters' rolling dividend payments were covered easily.


This article was written by

Ray Merola profile picture
Individual investor focused upon a limited number of diversified stocks. Seeks stocks selling below fair value estimates; favors dividend growth and/or income. Advocates fundamental investment analysis, supplemented by the technical charts. Options strategies primarily employed to generate additional income or hedge risk. If interested, you may find out more about my investment philosophy in the I.S.S. (Investment Strategy Statement) found in my listing of published articles or via this link: Investment Strategy Statement - Ray Merola | Seeking Alpha

Disclosure: I am/we are long RDS.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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