Europe’s largest oil company Royal Dutch Shell plc (RDS.A) reported slightly weaker-than-expected second quarter 2011 results, pulled down by lower production, together with a dip in European and Asian refining margins.
Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $2.10, below the Zacks Consensus Estimate of $2.12. Earlier this week, rival BP plc (BP) – still battling to recover from the Gulf of Mexico oil spill – also missed earnings forecasts.
However, compared with the year-ago period, Shell’s adjusted earnings per ADR improved 53.3% (from $1.37 to $2.10), while revenues were up 33.9% to $121.3 billion, reflecting higher commodity prices and the group’s robust operating performance.
Segmental Performance
Upstream: Upstream segment earnings during the quarter (excluding items) were $5.4 billion, up 66.3% from $3.3 billion (adjusted) earned in the year-ago period.
This primarily reflects the impact of higher oil and natural gas prices, better liquefied natural gas (LNG) realizations and volumes, higher dividends received from an LNG joint venture, improved trading contributions, as well as higher crude oil output, partly offset by lower natural gas volumes, increased production taxes, and higher operating expenses.
Upstream volumes averaged 3.0 million oil-equivalent barrels per day (MMBOE/d), down 2.1% from the year-ago period. This was due to a 5.3% fall in natural gas volumes, partially offset by a marginal increase in crude oil volumes (by 0.8%). Crude oil production contributed approximately 55% 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 285 MBOE/d.
LNG equity sales volumes of 4.81 million tons were 24% higher than the year-ago quarter, mainly due to higher volumes from Nigeria LNG, as well as the successful ramp-up of the Qatargas 4 project to full capacity.
Downstream: In the Downstream segment, Shell recorded a profit (excluding items) of $1.1 billion as against earnings of $1.2 billion (adjusted) in the year-ago period. The decline reflects the impact of lower refining contributions, almost fully offset by higher Oil Products marketing earnings and better Chemicals results.
Weak ex-U.S. downstream market conditions hampered the results of the Anglo-Dutch super major. Refining margins were significantly lower in Europe and Asia compared with the year-ago period. Shell’s results were also adversely affected by a decrease in refinery plant intake volumes. Refinery availability was down 4% from the same period of 2010 (from 94% to 90%).
Cash Flow
During the quarter, the group generated cash flow from operations of $10.0 billion, returned $1.8 billion to shareholders through dividends and spent $7.3 billion on capital projects.
Balance Sheet
As of June 30, 2011, the group had $19.5 billion in cash and $42.5 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 12.1%.
Outlook & Rating
Royal Dutch Shell – Europe's largest oil company by market value and ahead of 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.
With the economic rebound showing signs of strengthening and oil prices rallying, we expect integrated oil companies such as Royal Dutch Shell to continue to accelerate revenue and earnings growth over the next few quarters. Apart from the economic recovery, the group’s recent results have also benefited from its operational and production efficiency and contributions from growth programs.
The Hague-based group has been able to boost returns and remain competitive by embarking on aggressive cost reduction initiatives, exiting unprofitable markets and streamlining the organization.
Royal Dutch Shell ADRs currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.
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