The Rising Influence of Rising Affluence

[DewDiligence]

Here’s more on Shell’s shaky cash-flow math (i.e. why it's
been borrowing to fund cap-ex and the outsized dividend).

http://online.wsj.com/article/SB10001424052748703734504575125993600959692.html

›Still Not Sure of Shell

MARCH 16, 2010, 4:47 P.M. ET
By MATTHEW CURTIN

For Royal Dutch Shell investors, a hallelujah moment? Chief Executive Peter Voser reckons that by 2012, the oil giant may finally have enough cash to cover its huge capital-expenditure plans, increase output, maintain refineries, grow its dividend and still have some to spare. That would be a moment to savor after years of disappointment.

Of course, Shell has a history of flattering to deceive. And the scale of the challenge is daunting. In 2009, Shell generated $24 billion in operating cash flow excluding working-capital adjustments, yet invested $31 billion in capital expenditures and paid out $11 billion in dividends. As a result, net debt rose to $25 billion at the end of 2009 from $8 billion a year earlier.

Mr. Voser hopes high oil prices will do much of the hard work of eliminating the $17 billion shortfall. Shell is well geared to higher oil prices, thanks to investment in a number of megaprojects. Shell reckons annual output will increase to 3.5 million barrels of oil equivalent by 2012, up 11% from 2009, equivalent to compound annual growth of more than 3%. BP's medium-term target is growth of 1% to 2%. Only BG Group has a better outlook among international energy companies, according to Goldman Sachs.

At the current oil price of roughly $80 a barrel, Shell reckons operating cash flow should rise to $43 billion in 2012. Combined with lower capital expenditure, forecast to fall to $28 billion in 2010 and average between $25 billion and $30 billion until 2014, plus $1 billion to $3 billion of planned sales of refining assets, that should comfortably cover the dividend. But if oil falls back to $60 a barrel, the position will be much tighter.

That leaves Shell vulnerable to slow economic growth, hiccups in asset sales, and cost inflation. The gloomy near-term outlook for gas prices, gas demand and refining margins will also strain cash flow. Hence Shell's new dividend policy, which ties the payout to earnings and cash flow rather than developed world inflation but comes with an offer of a scrip alternative to help conserve cash. Mr. Voser's confidence clearly has its limits.‹