Shell discipline caps profit cheer

Shell shares continue to bask in the glow of profits at a four-year high, but when will it be able to spend more and grow more?

Stonking quarter

That’s not to take away from the solid performance of Britain’s oil supermajor in the fourth quarter. Current cost of supplies earnings, Shell’s preferred measure, excluding certain items the group regards as one-offs, jumped 32% to $5.7bn. Investors were expecting closer to $5.3bn. Nor was cash flow by any means a let-down. True, a reassessment of the capital needed for day-to-day operations worth $9bn boosted cash flow from operations to $22bn. But there’s no getting away from the fact that the literal bottom line of free cash flow for dividends and other shareholder reimbursements was up a stonking 42.7% in 2018 to $27.6bn. That underlines in solid black ink that the world’s biggest dividend payer can continue to shell out huge amounts of cash to investors each year as it reaps benefits from the painstakingly cautious spending it adopted in leaner years.

Discipline

Despite acceleration across profits and cash flow, Shell’s pledge to stick with spending discipline in 2019 partly explains still palpable shareholder reserve even with shares holding on to a rise of around 4% in London and New York. The group is determined to breakeven at $40 a barrel or less, even in tricky deepwater projects. That means it can maintain capex and dividends even if the oil price slumps well below current levels around $60/bbl. That’s a source of comfort, but it has limits. Every $10 rise or fall of prices lifts or drops Shell’s cash position by about $6bn. That the world’s No. 2 oil company by market cap remains prone to such volatility in cash flow and so decides to maintain its capex programme at $25bn -$30bn as per 2018 reveals the bind for the group and shareholders. Also, why the shares are up a modest 2.6% in January after Thursday’s gains and an 18% slump last year. Shell’s fabled dividend can survive further oil price drama but low-ball ambitions due to sensible prudence keeps the notion of much more growth from here open to question.

Thoughts on Shell’s technical price chart

For the near horizon, shell shares are on a roll after the bounce from 8-month lows at the beginning of January, near a region of support around £2170-£2210. Thursday’s surge also paces the stock’s 21-day moving average backed by rallying fine oscillators like slow stochastics, pointing to decent momentum. Thursday’s price leap was capped at an upper descending line, backing the formation of a wedge that would, typically, target upper prices at inception of the higher declining line in October, near £2690. But let’s not get carried away. Whether the flavour of the pattern is one of reversal or continuation is in question after Shell kyboshed three-year uptrend support late last year. Failure highs of £2456 in December and £2427 in January will be a litmus test.

Technical analysis chart: Royal Dutch Shell Plc. (LSE) – daily intervals – post close 31-01-2019

Source: Refinitiv/City Index