Shell Profit Rises, But Misses View - Analyst Blog

Europe's largest oil company Royal Dutch Shell plc (RDS.A) reported weaker-than-expected fourth quarter 2010 results, pulled down by volatility in downstream marketing margins (due to rising oil prices), higher taxes, and lower trading contributions.

Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $1.34, below the Zacks Consensus Estimate of $1.63. Earlier this week, rival BP plc (BP) – still battling to recover from the Gulf of Mexico oil spill – also missed earnings forecasts.   

However, compared with the year-ago period, Shell's adjusted earnings per ADR improved 48.9% (from 90 cents to $1.34), while revenues were up 24.2% to $100.7 billion, reflecting rising output and higher oil prices.

For full year 2010, Shell earned $5.89 per ADR (on a current cost of supplies basis) on revenues of $368.1 billion.

Segmental Performance

Upstream: Upstream segment earnings during the quarter were $3.4 billion (excluding a one-time net gain of $1.7 billion), up 24.6% from the $2.8 billion (adjusted) earned in the year-ago period. This primarily reflects the impact of higher oil and natural gas prices and production volumes, lower depreciation and exploration well write-off expenses, as well as better liquefied natural gas (LNG) realizations and output, partly offset by increased production taxes, reduced trading contributions, and lower dividends received from an LNG joint venture.

Upstream volumes averaged 3.5 million oil-equivalent barrels per day (MMBOE/d), up 5.3% from the year-ago period. This was primarily due to an 8.6% rise in natural gas volumes and a 2.2% increase in crude oil volumes. Crude oil production contributed approximately 50% of total volumes, while natural gas volumes accounted for the other half. Full-year production at Shell climbed 5.5% to 3.314 MMBOE/d, up from 3.1 MMBOE/d in the year-earlier period.

Production during the quarter compared with the year-ago quarter included increased volumes from new field start-ups and the continued ramp-up of existing fields, which boosted output by roughly 160 MBOE/d and more than made up for field declines.

LNG equity sales volumes of 4.39 million tons were 11% higher than the year-ago quarter, mainly due to the continuous ramp-up of Sakhalin-2 LNG production in Russia, as well as higher volumes from Nigeria LNG.

Downstream: In the Downstream segment, Shell incurred current-cost supplies (CCS) profit of $482 million (excluding a one-time net charge of $71 million) as against a loss of $427 million (adjusted) in the year-ago period. The turnaround reflects the impact of higher Oil Products marketing earnings, enhanced refining contributions, and improved Chemicals results.

Better global downstream market conditions benefited the results of the Anglo-Dutch super major. Refining margins were higher compared with the year-ago period and Shell's results were also helped by an increase in refinery plant intake volumes. Refinery availability was down marginally from the same period of 2009 (from 93% to 92%).

Cash Flow

During the quarter, the group generated cash flow from operations of $5.5 billion, returned $2.0 billion to shareholders through dividends and spent $6.2 billion on capital projects.

Balance Sheet

As of December 31, 2010, the group had $13.4 billion in cash and $44.3 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 17.1%.

Outlook

With the economic rebound showing signs of strengthening and oil prices rallying, we expect integrated oil companies such as Royal Dutch Shell to continue to accelerate revenue and earnings growth over the next few quarters. Apart from the economic recovery, the group's recent results have also benefited from its operational and production efficiency and contributions from growth programs.

The Hague-based group has been able to boost returns and remain competitive by embarking on aggressive cost reduction initiatives, exiting unprofitable markets and streamlining the organization.

As such, we see Royal Dutch Shell ADRs as an attractive long-term investment and rate it as Outperform.