By Nathaniel Taplin

After a stormy 18 months in which its expensive acquisition of BG was followed by a plunge in energy prices, Royal Dutch Shell has steadied the ship.

With big divestitures under way and higher cash flow, the energy giant's generous dividend also looks somewhat safer.

However, its long-term prospects are tied to natural gas prices and here the future is hazy.

First, the good news: although fourth quarter earnings fell, so did leverage. Debt peaked in the third quarter of 2016 and has fallen by over $3 billion following big legacy asset sales like the $3.8 billion North Sea deal with Chrysaor announced Tuesday.

New revenue from gas heavyweight BG has also helped cash flow cover Shell's expansive 7% dividend for the second quarter in a row. In this context, the company's moderately weaker fourth-quarter earnings aren't overly worrying. Upstream earnings will likely look better in 2017, as higher prices feed through.

The real question mark remains the Asian gas market. Although prices in Asia bottomed out in early 2016, they remain around 20% lower than when the BG purchase was announced. And while the company has done a good job opening up new markets such as Pakistan, Egypt and Singapore, supply options for the real prize--China--remain plentiful. Shell is now the largest liquefied natural gas supplier to China, but the nation also imports natural gas by pipeline from Turkmenistan and Myanmar and is eyeing supplies from Russia and North America. Chinese gas demand has rebounded, but slowing industrial and electricity demand growth in 2017 and 2018 could be a renewed drag.

Shell is on a stronger footing as energy prices have rebounded and leverage has fallen. The future for shareholders is now more than ever tied to volatile Asian gas prices--and China.

Write to Nathaniel Taplin at

(END) Dow Jones Newswires

February 02, 2017 06:34 ET (11:34 GMT)

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