Energy major Royal Dutch Shell PLC’s (RDS.A) fourth-quarter earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at 91 cents, which fell quite some distance short of the year-ago result at $1.27 and also missed the Zacks Consensus Estimate of $1.32.
The negative comparisons were due to poor upstream performance and sharply lower downstream profitability. Revenue remained flat at approximately $81.1 billion.
Estimate Revisions Trend
Royal Dutch Shell’s quarterly miss didn’t come as a major surprise. Though there were no estimate revisions in either direction over the last 7 days, earnings estimates for the company have been trending slightly down over the past few months, with the quarterly Zacks Consensus Estimate going down by 2 cents and 19 cents per share during the last 30 days and 60 days, respectively.
With respect to earnings surprises, Shell has had a bearish run lately, including the quarter just reported. This is the company’s 3rd negative surprise in the past 4 quarters.
Looking ahead to the first quarter of 2010, there have been no estimate revisions in either direction over the last 30 days. The lack of estimate revisions implies that there is no pressure on the performance of the stock in the upcoming quarter. As a result, our short-term recommendation on the stock is Hold (Zacks Rank #3), meaning that it should perform relatively in line with the overall market over the next 1-3 months.
Upstream
Upstream earnings during the quarter were $2.8 billion (excluding a one-time net charge of $226 million), down 15.4% year-over-year, primarily reflecting the impact of lower natural gas and LNG prices, lower oil production volumes, and redundancy provisions, partly offset by higher oil prices and increased LNG sales volumes.
Upstream volumes averaged 3.3 million oil-equivalent barrels per day (MMBOE/d), down 2.5% from the year-ago period. This was primarily due to a 4.0% drop in crude oil volumes (natural gas volumes remained broadly flat). Crude oil production accounted for approximately 51% of total volumes, while natural gas volumes accounted for the rest.
Production during the quarter compared to the year-ago quarter included increased volumes from the continuing ramp-up of fields started over the past 12 months. Additionally, the fourth quarter 2009 volumes benefited from new field start-ups (contributing roughly 200 MBOE/d of new production to the quarter).
LNG equity sales volumes of 3.96 million tons were 18% higher than the year-ago quarter, mainly due to the continuous ramp-up of North West Shelf Train 5 in Australia and the Sakhalin-2 LNG production in Russia, as well as higher sales from Oman LNG, somewhat offset by lower volumes from Nigeria LNG.
Downstream
In the Downstream segment, Shell incurred current-cost supplies (CCS) loss of $427 million (excluding a one-time net charge of $1.3 billion) as against earnings of $966 million in the year-ago period. This reflects the impact of substantially lower realized refining margins and lower refinery plant intake volumes, coupled with asset impairments, redundancy and restructuring provisions.
Additionally, adverse global downstream market conditions have hampered the quarterly results through substantially lower marketing margins and reduced Oil Products sales volumes. These factors were partly offset by lower costs and improved Chemicals earnings.
Demand for refined products continued to remain depressed in the face of plentiful supply, resulting in weak margins on a worldwide basis. As a result of depressed demand, refinery plant intake volumes declined 4% compared to the fourth quarter of 2008. However, refinery availability was up on a year-over-year basis (from 90% to 93%).
During the quarter, the group generated cash flows from operations of $5.7 billion, returned $2.6 billion to shareholders through dividends, and spent $8.8 billion on capital projects.
Balance Sheet
As of December 31, 2009, the group had $9.7 billion in cash and $35.0 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 15.5%.
Outlook
Echoing fierce rival BP Plc (BP), Shell management indicated about signs of improvement in energy demand and pricing but at the same time said that the outlook remains far from rosy with no quick recovery in sight.
Shell’s restructuring program, which involved shedding 5,000 jobs (or 5% of the group’s work force), resulted in $2 billion in annual savings. For 2010, the company is targeting the axing of another 1,000 jobs (predominantly at its refining operations) and to save further $1 billion in costs.
Volumes are expected to remain flat in 2010 and new fields will only really begin adding to production in 2011. Additionally, Shell announced that it will freeze its dividend in 2010 at current levels.
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