Thursday, July 29, 2010

Shell Posts Higher Profit on Oil Prices, Production

Royal Dutch Shell Plc, Europe’s largest oil company, posted a 15 percent increase in second- quarter profit on higher oil prices and production as it exceeded a target for cost savings.

Net income rose to $4.39 billion from $3.82 billion a year earlier, The Hague-based Shell said today in a statement. Excluding one-time items and inventory changes, earnings beat analyst estimates.

Peter Voser, in his second year as chief executive officer, expects to double asset sales to as much as $8 billion by the end of 2011. Cost savings of $3.5 billion beat an earlier target by about 15 percent and were completed early, resulting in 7,000 job reductions 18 months ahead of schedule.

“Overall, it’s a reasonable performance,” Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking, said by phone.

The results follow a record loss for BP after Shell’s close rival set aside about $30 billion earlier this week to pay for cleanup costs and liabilities arising from the Macondo well disaster. Shell will study any assets put up for sale by BP, Voser said on a conference call.

Excluding one-time items and inventory changes, Shell’s earnings were $4.21 billion. That beat the $4.08 billion median estimate of 14 analysts surveyed by Bloomberg. Production rose 5 percent to 3.11 million barrels of oil equivalent a day.

Mixed Signals

Voser cautioned that the outlook for earnings and cashflow remain uncertain due to “mixed signals” in the global economy.

Oil prices have remained firm so far this year, but refining margins, oil products demand and natural gas spot prices all remain under pressure,” he said in the statement.

Shell’s Class A shares traded in London fell 0.2 percent to 1,783.5 pence. The stock is down 5.2 percent this year, compared with a 31 percent decline for BP, which at one point lost more than half its market value on concerns over the mounting cost of containing the leak.

Voser is targeting hard-to-reach rock formations in Australia, China and the U.S, as well as projects in Qatar, to boost production growth. As much as 40 percent of the company’s capital spending in the next few years has been earmarked for the Asia Pacific region. This year has already seen startups in the Gulf of Mexico and Brazil with Perdido and the BC-10 project, while the Sakhalin project in Russia has beaten production goals.

Higher Costs

Producers including Shell face higher costs following a U.S. clampdown on offshore drilling arising from the oil spill. Shell has the most rigs affected by the ban. “Our estimate for the full-year impact of the moratorium is around $200 million after tax,” Chief Financial Officer Simon Henry told investors on a conference call.

The company idled five floating rigs and two platform rigs in the Gulf of Mexico and Alaska, leading to a charge of $56 million in the second quarter, Henry said. Rig rates and services were renegotiated and in some cases cut by 60 percent to 70 percent because of the moratorium, he said. Production from Perdido, shut down in April for maintenance, will resume in October.

Shell is still seeking to dispose of 15 percent of its refining capacity and is selling retail assets in Africa and Latin America, putting a total of 35 percent of its current retail markets under review. Voser is assessing more than 35 projects that may add 8 billion barrels of oil equivalent resources, boosting production until 2020.

Adding Gas

Shell, which has been adding more gas than oil to its resources since 2005, expects the share of gas as a proportion of total output to rise to 52 percent in 2012.

Shell’s output at the Athabasca oil sand project in Canada was affected by maintenance. The unit restarted last month. Production was also disrupted by the suspension of pumping at the offshore EA field in Nigeria.

Crude prices averaged $78.05 a barrel in New York in the three months ending June, an increase of 31 percent from a year earlier.

Refining margins are picking up after averaging $5.49 in the second quarter from $3.08 in the first three months of the year, according to BP’s Global Indicator Margin, a broad measure of the profitability of turning crude into fuels.

To contact the reporter on this story: Fred Pals in Amsterdam at

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