Is your company ex-growth? How chief executive officers must hate that question. It is not as inane as it sounds – some companies get big and profitable and then find themselves unable to get any bigger or more profitable. (Supermarkets are an example.) Even Big Oil may not be immune.
Looked at from one angle, Shell has run out of growth motors. Its full-year earnings for 2013 were down 14 per cent at $27-billion (U.S.) and were flat in its upstream operations. It produced just 1 per cent more oil and gas than a year ago despite $32-billion of capital expenditure. And on Thursday it did what companies that want to distract from the fact they are ex-growth sometimes do – it raised its dividend.
On the face of it, this is not where a company entering the second year of a four-year growth program really ought to be. True, Shell's underlying production growth last year was a not-too-bad 3 per cent. But given its aim of getting to four million barrels of oil equivalent by 2017 from 3.3 million today, it probably needs to be higher. Also on the credit side, Shell's operations produce a lot of cash – $46-billion last year, up a quarter on 2011. Operating cash flow from its downstream activities more than doubled year on year. The higher cash flow allowed the company to reduce its gearing to under 10 per cent and justifies the 5-per-cent rise in the dividend.
The danger for Shell is that it is running to stand still. Its return on capital employed fell to 13 per cent in 2013 from 16 per cent, and it may struggle to get it moving forward again. It has $220-billion of projects, but almost a third are not productive yet. The company maintains that $10-billion of that unproductive capital will start producing in 2013. And it has 30 projects under construction that should add $15-billion of cash flow by 2015.
But capex continues to swell – a projected $33-billion this year – just to keep things ticking over. For that sort of outlay, Shell ought to be growing at a faster pace.