RDSA Shell Plc

By Sarah Kent 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 28, 2017).

LONDON -- Royal Dutch Shell PLC presented a pessimistic vision for the future of oil on Thursday, even as the company reported success in generating cash during a prolonged energy downturn.

Shell has cut costs and said it is preparing for a world in which crude prices may never regain precrash levels and petroleum demand eventually declines. Shell Chief Executive Ben van Beurden said the company has a mind-set that oil prices would remain "lower forever" -- a riff on the "lower for longer" mantra the industry adopted for a price slump that has proved unexpectedly lasting.

"We have to have projects that are resilient in a world where oil has peaked," Mr. van Beurden told reporters on a conference call discussing the company's second-quarter financial results. "When it will happen we don't know, but that it will happen we are certain."

The views of the British-Dutch oil company reflect the transition under way in a global energy industry grappling with the twin forces of an oil-supply glut and a looming consumer shift away from petroleum. These trends are even more pronounced for oil companies in Europe, where local and national governments are trying to phase out vehicles with internal-combustion engines, encourage electric automobiles and reduce overall carbon emissions.

Experts differ on the timing of peak oil demand. In its most-guarded scenario, Shell sees oil peaking within the coming decade. The International Energy Agency says the timing will be more like 2040. The advent of declining demand -- after decades of unrelenting growth -- would likely erode the value of oil and the companies that produce it.

On the other hand, U.S. energy giants such as Exxon Mobil Corp. and Chevron Corp. have said peak oil demand is still far off. And even when oil consumption eventually stops growing, Shell isn't expecting it to drop off a cliff.

"It doesn't mean it's game over straight away," Mr. van Beurden said. "There will be a continued need for investment in oil projects."

Mr. van Beurden's comments are broadly in line with Shell's overall strategy of moving toward producing fuel for electricity, such as natural gas and even renewables, and focusing on keeping costs low. The company now produces more gas than oil. It is also building a massive wind farm off the Dutch coast and envisions spending as much as $1 billion a year on developing new energy sources such as renewables by the end of the decade.

Despite Shell's warnings on oil, the company posted what analysts said was a strong second quarter.

Shell's equivalent of net profit rose to $1.9 billion from $239 million a year earlier and its cash flow from operations -- a metric that has become increasingly important to investors -- soared to $11.3 billion. The company said it generated $38 billion of cash from its business over 12 months, enough to cover dividend payments and pare debt.

French oil giant Total SA and Norway's Statoil ASA also reported their quarterly results on Thursday, both striking a confident if cautious note. They trumpeted falling debt levels and strong cash flow.

Total's profit for the quarter was $2 billion, roughly the same as last year, while the company reported a significant increase in cash flow from operations to $4.6 billion.

Statoil said it earned $1.4 billion, compared with a loss of $302 million in last year's second quarter. The company said it generated $4 billion in free cash flow.

Exxon and Chevron report earnings on Friday.

Cash flow has become an important way to gauge the health of big oil companies during the price downturn because it demonstrates their ability to make dividend payments to investors without taking on new debt.

Hefty, regular dividends are a significant reason big investors put money in oil companies, which historically haven't held out much hope of significant share-price growth because of their size. Investors are particularly wary in an era of low oil prices.

At the depths of the oil-price crash, big oil companies took on tens of billions of dollars in debt to help cover dividend payments. Several offer payouts as company shares, known as scrip -- a practice that has kept investors happy in the short-term but was widely seen as unsustainable.

In the first quarter of last year when oil hit its nadir of $27 a barrel, Shell's cash flow fell to just $700 million. Oil's fragile recovery since then to around $50 a barrel has helped the sector, but Shell and its peers have also engaged in aggressive efforts to bring down costs so they can survive at lower prices. Shell said that removing its scrip dividend remains a priority that it is working toward.

"We are getting fit for the 40s," Mr. van Beurden said, referring to a world in which oil prices are below $50 a barrel.

Write to Sarah Kent at sarah.kent@wsj.com

(END) Dow Jones Newswires

July 28, 2017 02:47 ET (06:47 GMT)

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