Europe’s largest oil company Royal Dutch Shell plc (RDS.A) reported weaker-than-expected fourth quarter 2011 results, pulled down by dismal refining margins, declining output and a sharp downturn in North American natural gas prices. Notwithstanding the tough quarter, the company announced that it is aiming to boost its payout for the first time in three years.
Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $1.55, well below the Zacks Consensus Estimate of $1.84.
However, compared with the year-ago period, Shell’s adjusted earnings per ADR improved 15.7% (from $1.34 to $1.55), while revenues were up 14.8% to $115.6 billion, reflecting high crude oil prices.
For its fiscal year ended December 31, 2011, Shell reported profit (excluding one-time items and inventory changes) of $7.94 per ADR, failing to match the Zacks Consensus Estimate of $8.39 per ADR but up from $5.89 per ADR in 2010. Revenues of $470.2 billion were 27.7% above the year ago period.
Segmental Performance
Upstream: Upstream segment earnings during the quarter (excluding items) were $5.1 billion, up 48.5% from $3.4 billion (adjusted) earned in the year-ago period.
This primarily reflects the impact of higher liquids and natural gas realizations, better liquefied natural gas (LNG) realizations and volumes, together with higher dividends from an LNG project, partly offset by lower liquids and natural gas production volumes as well as higher depreciation and exploration expenses.
Upstream volumes averaged 3.3 million oil-equivalent barrels per day (MMBOE/d), down 5.5% from the year-ago period. Natural gas volumes fell 5.4%, while crude oil output decreased 5.6% from the corresponding period last year. Crude oil production contributed approximately 50% 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 3% lower 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 30% above the year-earlier level, while natural gas realizations increased by 12%. In particular, natural gas prices in North America fell 10% from the year-earlier levels though it was up 22% overseas.
LNG equity sales volumes of 4.84 million tons were 10% higher than the year-ago quarter, mainly due to contribution from the Qatargas 4 project.
Downstream: In the Downstream segment, Shell recorded a loss (excluding items) of $278 million as against earnings of $482 million in the year-ago period. The downtrend reflects the impacts of weak downstream market conditions (characterized by decreased refining realizations) and lower Chemicals results. A dip in refinery plant intake volumes and reduced trading contributions also hamstrung the results of the Anglo-Dutch super major.
To some extent, these factors were offset by lower operating expenses and improved oil products unit marketing margins.
Refinery availability, at 92%, was in line with the same period of 2010.
During the quarter, the group generated cash flow from operations of $6.5 billion, returned $2.6 billion to shareholders through dividends/share buybacks and spent $11.0 billion on capital projects.
More importantly, Shell announced that it would hike its dividend by 2% from next quarter, the first growth since 2009.
Balance Sheet
As of December 31, 2011, the group had $11.3 billion in cash and $37.2 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 13.1%.
Outlook & 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 a 30-50% rise in cash flow and a 25% growth in output during the coming years.
However, the vertically-integrated energy entity cautioned that the world economy and energy markets 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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