Oil major Royal Dutch Shell (RDSB) is down 2.2% to £25.30 despite a seemingly very strong first quarter update. What is going on?
In our view several factors account for this apparently anomalous market reaction. For one, the risk appetite of global investors has subsided through the course of this week with government bond yields in the US hitting multi-year highs.
Secondly, expectations for these results were very elevated thanks to the recent spike in oil prices to $75 per barrel.
LOOK BEYOND HEADLINES
Finally, while the headline numbers look good, there were some less flattering aspects of the results and they come hot on the heels of disappointment over performance in the previous quarter.
The company’s preferred measure of profit (net income attributable to shareholders, based on a current cost of supplies and excluding identified items) is up 42% to $5.32bn and slightly ahead of consensus at $5.28bn.
It is also the highest level of profit in more than three years as the company benefit from the higher oil price and increased production.
CASH IS KING
But, as AJ Bell investment director Russ Mould observes, cash generation is potentially a more relevant consideration, ‘particularly because the company is so highly prized for its generous dividend and strong cash flow helps underpin confidence in its sustainability.
‘Here the picture is a bit more mixed,’ he adds. ‘There is a recovery from the previous quarter's disappointing performance but cash flow from operations was still down marginally on a year-on-year basis.
‘While a higher oil price is great news for the production side of the business, its refining arm has suffered thanks to the higher input costs implied by more expensive crude.’
