Royal Dutch Shell (RDS.A)/(RDS.B) posted an impressive first quarter with earnings growth across all operating segments and continued strong cash flow generation. These results stand out from the relatively weak reports of other integrated oil companies and demonstrate the value of Shell’s integrated model while supporting our thesis of continued earnings and free cash flow growth for the next several years. As such, our fair value estimate and narrow economic moat rating are unchanged. We continue to think that Shell’s improvement is underappreciated by the market, leaving the shares trading a wide discount to our fair value estimate.
Adjusted earnings slipped to $5.4 billion from $5.5 billion in the year-ago quarter as improved performance in the operating segments was offset by higher corporate charges due to the absence of tax credits and changes related to IFRS 16 implementation. Integrated gas segment earnings increased to $2.5 billion from $2.4 billion as higher realized prices and increased contributions from liquefied natural gas portfolio optimization offset lower production and sales volumes. Upstream earnings improved to $1.7 billion from $1.6 billion last year as reduced operating expenses and higher volumes outweighed the impact of lower oil prices. Production across the entire portfolio, including upstream and integrated gas, fell 2% to 3.75 million barrels of oil equivalent a day from 3.84 mmboe/d the year before, largely due to divestments and maintenance activity. Volumes are expected to bounce back in the second quarter thanks to new project ramp-ups and lower maintenance activity.
Allen Good, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.