Europe's largest oil company
Royal Dutch Shell plc
(
RDS.A
) reported disappointing second quarter 2012 results, as depressed
crude and North American gas prices more than offset higher
upstream volumes and refining margins.
Earnings per ADR (on a current cost of supplies basis),
excluding one-time items and gains or losses from inventories, came
in at $1.82, below the Zacks Consensus Estimate of $2.13 and the
year-ago result of $2.10. Revenues were down 3.5% to $117.1
billion.
Segmental Performance
Upstream:
Upstream segment earnings during the quarter (excluding items) were
$4.5 billion, down 16.9% from $5.4 billion (adjusted) earned in the
year-ago period.
This primarily reflects the impact of lower liquids realizations,
depressed natural gas prices in North America, higher depreciation
and exploration expenses, muted trading contributions, together
with planned maintenance activities that adversely impacted
production. These factors were partly offset by higher output and
better liquefied natural gas (LNG) realizations.
Upstream volumes averaged 3.1 million oil-equivalent barrels per
day (MMBOE/d), up 1.9% from the year-ago period. Natural gas
volumes rose 8.1%, while crude oil output dipped 3.4% from the
corresponding period last year.
Crude oil contributed approximately 52% of total volumes, while
natural gas accounted for the rest. Excluding the effects of lost
production on account of divestments and other reasons, Shell's
output was 4% higher than the year-earlier level.
Production during the quarter compared with the year-ago quarter
included volumes from new field start-ups and the continued ramp-up
of existing fields, which boosted output by roughly 205 MBOE/d.
Shell's worldwide realized liquids prices were 4% below the
year-earlier level, while natural gas realizations decreased by 7%.
In particular, natural gas prices in North America plummeted 52%
from the year-earlier levels.
LNG equity sales volumes of 4.57 million tons were 5% lower than
the year-ago quarter, mainly due to planned repair work (mainly in
Nigeria and Australia), somewhat made up by enhanced output from
the Qatargas 4 project and startup of the Pluto LNG development in
Australia.
Downstream:
In the Downstream segment, Shell recorded a profit (excluding
items) of $1.3 billion as against adjusted earnings of $1.1 billion
in the year-ago period. The uptrend reflects the impacts of lower
operating expenses and increased refining realizations.
A rise in oil products sales volumes also helped the results of
the Anglo-Dutch super-major. To some extent, these factors were
offset by lower trading contributions and a reduction in Chemicals
earnings.
Cash Flow
During the quarter, the group generated cash flow from operations
of $13.3 billion, returned $3.7 billion to shareholders through
dividends/share buybacks and spent $8.1 billion on capital
projects.
Balance Sheet
As of June 30, 2012, the group had $17.3 billion in cash and $33.0
billion in debt (including short-term debt). Net
debt-to-capitalization ratio stood at approximately 8.1%.
Outlook, Rating & Recommendation
Royal Dutch Shell - Europe's most valued oil company, ahead of
BP plc
(
BP
) and
Total SA
(
TOT
) - owns one of the largest integrated oil and gas businesses in
the world. The group has operations all over the world and is
involved in various activities related to oil and natural gas,
chemicals, power generation, renewable energy resources and other
energy-related businesses.
The Hague-based group continues to make solid progress with its
long-term strategic plan that aims to cope with significant energy
price fluctuations stemming from economic and political
developments. With a capital expenditure war chest of $32 billion
in 2012, the company's financial and production growth plans are
well on track.
Shell has been looking to boost returns and remain competitive by
embarking on aggressive cost reduction initiatives, exiting
unprofitable markets, refocusing its efforts on emerging economies
and streamlining the organization.
In particular, the vertically-integrated energy entity said that
its substantial investment in more than 20 key upstream projects
under construction is expected to drive output during the coming
years.
The company continues to strengthen its potential exploration
acreage (including new liquids rich shale and deepwater plays), in
addition to reviewing new integrated gas options in North America.
However, Shell is particularly susceptible to its high exposure to
the downstream business, its major natural gas focus, as well as
lofty capital spending, which may result in reduced returns going
forward.
Royal Dutch Shell ADRs currently retain a Zacks #3 Rank, which
translates into a short-term Hold rating. We are also maintaining
our long-term Neutral recommendation on the stock.
BP PLC (BP): Free Stock Analysis Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis
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