Energy major Royal Dutch Shell PLC’s (RDS.A) third-quarter earnings per ADR, excluding non-recurring items, came in at 86 cents, which fell way short of the year-ago result at $2.62 and also missed the Zacks Consensus Estimate of 94 cents. The year-over-year negative comparisons were due to sharply lower upstream and downstream profitability. Revenue declined approximately 43% to $75 billion.
Upstream
Upstream earnings during the quarter were $1.7 billion (excluding a one-time net charge of $123 million), down 73.5% year-over-year, primarily reflecting the impact of significantly lower oil and gas prices, partly offset by higher gas sales volumes along with reduced royalty and tax expenses. Upstream volumes averaged 2.9 million oil-equivalent barrels per day (MMBOE/d), almost flat from the year-ago period, as a drop in crude oil volumes was canceled by increased natural gas production. Crude oil production accounted for approximately 56% 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 in recent years. Additionally, the third quarter 2009 volumes benefited from new field start-ups (contributing roughly 180 MBOE/d of new production to the quarter). LNG equity sales volumes of 3.49 million tons were 13% higher than the year-ago quarter, mainly due to the start-up of North West Shelf Train 5 in Australia and the Sakhalin-2 LNG production in Russia, somewhat offset by lower volumes from Nigeria LNG and reduced Asia Pacific LNG demand.
Downstream
In the Downstream segment, current-cost supplies (CCS) earnings were down approximately 61.7% year-over-year to $756 million (excluding a one-time gain of $536 million), reflecting the impact of substantially lower realized refining margins and lower refinery plant intake volumes, coupled with reduced marketing and chemicals margins. These factors were partly offset by lower costs. 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 8% compared to the third quarter of 2008. However, refinery availability was up on a year-over-year basis (from 88% to 94%), as the year-ago period was adversely impacted by hurricanes in the U.S.
Cash Flows
During the quarter, the group generated cash flows from operations of $7.3 billion, returned $2.7 billion to shareholders through dividends, and spent $7.8 billion on capital projects.
Balance Sheet
As of September 30, 2009, the group had $14.3 billion in cash and $36.3 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 13.7%.
Outlook
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 (involving the improvement of its cost structure and the elimination of some 5,000 employees) is expected to bear results only by the first half of 2010. Till then, we maintain our Neutral rating on the company. Further, we believe that Shell’s significant refining exposure will keep it under pressure for the next few quarters.
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