Europe’s largest oil company Royal Dutch Shell plc (RDS.A) reported strong third quarter 2010 results, buoyed by a robust operating environment, production growth and cost cutting initiatives.
Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $1.61, significantly ahead of the year-ago result of 86 cents and also exceeded the Zacks Consensus Estimate of $1.34. Revenues were up 20.9% to $90.7 billion.
Shell’s comfortable earnings beat has put the pressure on rival BP plc (BP), which reports next week. The British giant is struggling to cover the costs of the Gulf of Mexico oil spill. U.S. oil behemoths ExxonMobil Corp. (XOM) and Chevron Corp. (CVX) are scheduled to report earnings later today and tomorrow, respectively.
Upstream
Upstream segment earnings during the quarter were $3.4 billion (excluding a one-time net charge of $284 million), up significantly from the $1.7 billion earned in the year-ago period. This primarily reflects the impact of higher oil and natural gas prices and production volumes, lower operating costs, lower exploration well write-off expenses, better liquefied natural gas (LNG) realizations and output, as well as higher dividends received from an LNG joint venture, partly offset by increased production taxes.
Upstream volumes averaged 3.1 million oil-equivalent barrels per day (MMBOE/d), up 4.8% from the year-ago period. This was primarily due to a 6.5% rise in natural gas volumes and a 3.5% increase in crude oil volumes. Crude oil production accounted for approximately 56% of total volumes, while natural gas volumes accounted for the rest.
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 180 MBOE/d and more than made up for field declines.
LNG equity sales volumes of 4.26 million tons were 22% 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 $1.5 billion (excluding a one-time net charge of $1.1 billion) as against earnings of $756 million in the year-ago period. The upward movement reflects the impact of enhanced refining contributions, improved Chemicals earnings, and lower operating costs.
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 94% to 93%).
During the quarter, the group generated cash flow from operations of $9.0 billion, returned $2.6 billion to shareholders through dividends and spent $11.0 billion on capital projects.
Balance Sheet
As of September 30, 2010, the group had $11.3 billion in cash and $45.1 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 19.0%.
Outlook
Shell management indicated that higher energy prices, operational and production efficiency, as well as Shell’s growth programs have led to the improvement in results.
Shell plans to boost returns and remain competitive in this difficult environment by embarking on aggressive cost reduction initiatives, exiting unprofitable market and streamlining the organization. As of now, the company has decided to increase focus on the more lucrative and well performing ‘upstream’ exploration and production-end of the business mainly natural gas.
The Hague-based group continues to make progress on cost cuts, capital efficiency, and long term growth options.
Our Recommendation
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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