Energy major Royal Dutch Shell PLC (RDS.A) reported strong first-quarter 2010 results, buoyed by higher energy prices and production growth. 
 
Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $1.57, which were quite some distance ahead of the year-ago result of 98 cents and also exceeded the Zacks Consensus Estimate of $1.32. Revenue was up 47.8% to $86.1 billion.
 
Shell’s comfortable earnings beat replicates the accomplishment attained by European rival BP Plc (BP), which also reported better-than-expected results yesterday. U.S. oil giants ExxonMobil Corp. (XOM) and Chevron Corp. (CVX) are scheduled to report earnings later this week.
 
Upstream
 
Upstream earnings during the quarter were $4.3 billion (excluding a one-time net gain of $110 million), more than double of $1.9 billion earned in the year-ago period. This primarily reflects the impact of higher oil prices, improved oil and gas production volumes, and significantly higher liquefied natural gas (LNG) sales volumes, partly offset by lower natural gas realizations (particularly in Europe) and higher royalty expenses. 
 
Upstream volumes averaged 3.6 million oil-equivalent barrels per day (MMBOE/d), up 6.2% from the year-ago period. This was primarily due to an 11.5% rise in natural gas volumes (crude oil volumes remained broadly flat). Crude oil production accounted for approximately 48% 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 new field start-ups and the continued ramp-up of existing fields, which boosted output by roughly 200 MBOE/d.
 
LNG equity sales volumes of 4.23 million tons were 38% 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 $778 million (excluding a one-time net charge of $35 million) as against earnings of $1.2 billion in the year-ago period. The downward movement reflects the impact of significantly lower realized refining margins and lower refinery plant intake volumes, and lower marketing contributions, which were to some extent offset by improved Chemicals sales volumes and earnings.
 
Adverse global downstream market conditions continue to hamper downstream results of Europe’s biggest oil company. 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 5% compared to the first quarter of 2009. Refinery availability was down on a year-over-year basis (from 92% to 89%).
 
Cash Flows
 
During the quarter, the group generated cash flows from operations of $4.8 billion, returned $2.6 billion to shareholders through dividends, and spent $6.6 billion on capital projects.
 
Balance Sheet
 
As of Mar 31, 2010, the group had $8.4 billion in cash and $37.3 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 17.1%.
 
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.
 
In view of the increasingly bearish outlook for the marketing and refining operations, Shell has taken certain steps to streamline its struggling downstream portfolio. As part of that plan, the Hague-based integrated major sold its retail and refining interests in New Zealand and is looking at further disposals. Shell is also making good progress in its initiative to save at least $1 billion in 2010.
 
The Anglo-Dutch supermajor further informed the successful startup of projects in the Gulf of Mexico and Singapore, together with other new projects, will help it to realize its goal of raising annual production by 11% through 2012.
 
Shell plans to boost returns and remain competitive in this difficult environment by embarking on aggressive cost reduction initiatives, exiting unprofitable markets, and streamlining the organization. As of now, Shell has decided to boost focus on the more lucrative and well performing ‘upstream’ exploration and production-end of the business mainly natural gas.
 
Currently, we are Neutral on Royal Dutch Shell.
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