Oil Prices, New Projects Lift Shell - Analyst Blog

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Europe's largest oil company Royal Dutch Shell plc ( RDS.A ) reported strong first quarter 2012 results, thanks to higher oil prices and contribution from new projects.

Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $2.33, above the Zacks Consensus Estimate of $2.29 and comfortably ahead of the year-ago result of $2.04. Revenues were up 9.1% to $119.9 billion.

Segmental Performance

Upstream: Upstream segment earnings during the quarter (excluding items) were $6.3 billion, up 34.8% from $4.6 billion (adjusted) earned in the year-ago period.

This primarily reflects the impact of higher liquids realizations and output, better liquefied natural gas ( LNG ) realizations and volumes, together with improved trading contributions, partly offset by lower natural gas prices in North America as well as higher depreciation and exploration expenses.

Upstream volumes averaged 3.6 million oil-equivalent barrels per day (MMBOE/d), up 1.4% from the year-ago period. Natural gas volumes rose 2.4%, while crude oil output remained flat compared to the corresponding period last year. Crude oil production contributed approximately 47% of total volumes, while natural gas volumes accounted for the rest. Excluding the effects of lost production on account of divestments, 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 290 MBOE/d.

Shell's worldwide realized liquids prices were 15% above the year-earlier level, while natural gas realizations increased by 8%. However, natural gas prices in North America fell 32% from the year-earlier levels though it was up 20% overseas.

LNG equity sales volumes of 5.17 million tons were 17% higher than the year-ago quarter, mainly due to contribution from the Qatargas 4 project and enhanced production in Nigeria.

Downstream: In the Downstream segment, Shell recorded a profit (excluding items) of $1.1 billion as against earnings of $1.7 billion in the year-ago period. The downtrend reflects the impacts of weak downstream market conditions (characterized by decreased refining realizations) and lower marketing results. A dip in refinery plant intake volumes and oil products sales volumes also hamstrung the results of the Anglo-Dutch super-major.

To some extent, these factors were offset by lower operating expenses and the ethanol joint venture in Brazil.

Refinery availability, at 94%, was 2% above that achieved in the same period of 2010.

Cash Flow

During the quarter, the group generated cash flow from operations of $13.4 billion, returned $2.7 billion to shareholders through dividends/share buybacks and spent $7.0 billion on capital projects.

Balance Sheet

As of March 31, 2012, the group had $15.0 billion in cash and $34.8 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 9.9%.

Outlook, Recommendation & Rating

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 three-year strategic plan that commenced in 2010. Shell has been able 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 company said that its substantial investment in new projects is expected to drive output to about 4 MMBOE/d during the coming years. In 2012, Shell expects to sell off over $4 billion of non-strategic properties, up from the previous target of $2-$3 billion.

However, the vertically-integrated energy entity cautioned that the world economy and energy markets - particularly downstream and North American natural gas prices - are likely to experience persistent high volatility.

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.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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