Oil major Royal Dutch Shell (RDSB) surges 4.2% to £25.34 as investors ignore refinery writedowns to focus on a strong underlying first quarter performance and a 4% dividend hike to 47 cents per share.
Adjusted net income of $7.3 billion was significantly ahead of the consensus forecast of just under $5 billion. It follows yesterday's positive first quarter update from BP (BP.) which saw profits marginally ahead of expectations. Shell plans to divest $15 billion worth of assets this year as part of a broader drive by the big oil companies to improve profitability and payouts.
Cash flow increased to $14 billion from $11.6 billion in the first quarter of 2013 and $6 billion in the fourth quarter of 2013 and the company's integrated natural gas arm benefited from an increase in the benchmark US Henry Hub price and strong liquefied natural gas markets in Asia.
On a more sober note the $2.9 billion charge taken on the refining business meant Shell's official earnings for the first three months of the year actually fell 44% to $4.5 billion and profits in the refining and marketing division were down 15% to $1.58 billion. The industry faces excess capacity and changing product demand as well as pressure on exports from new US shale oil supplies.
RBC Capital Markets analyst Peter Hutton retains his 'outperform' rating and £26 price target.
He comments: 'Both volumes and realisations in the upstream were close to our estimates, suggesting that in addition to strong LNG trading results, much of the beat probably reflected lower costs. We have highlighted the potential that additional provisions may have been taken within divisions and experience suggests that the cumulative effect of this can be material; it is possible that some businesses were indeed cautious last year and this further benefited this quarter's result.'
Investec's Neill Morton reiterates his 'hold' stance and puts his price target under review. He also warns investors about reading too much into today's announcement. 'We note that Q1 is usually a strong quarter for Shell (including seasonally lower costs). Current full-year consensus is $22 billion so, while this is a good start, we would caution against "over-extrapolation".'