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Rescued by fuel sales and refining

Financial Times: Rescued by fuel sales and refining

“fails to mask the problems in Shell’s basic business of finding and producing oil.”

By James Boxell

Jul 30, 2004

Shell is reaping the benefits, like its international peers, of record oil prices as demonstrated by net adjusted earnings of $3.8bn (£2.1bn) in the second quarter of 2004.

This is 16 per cent higher than the same period last year but it fails to mask the problems in Shell’s basic business of finding and producing oil.

As Richard Rose, analyst at Oriel Securities, put it: “Their downstream business managed to get the upstream (exploration and production) business off the hook.”

Most of the good downstream news came from the oil products division, which refines and sells fuels.

Quarterly earnings at the unit rose 59 per cent year-on-year to $1.6bn.

This was in marked contrast to exploration and production, which fell 3 per cent to $1.9bn. The shortfall came because of a 5 per cent decline in its production of oil and gas and a $330m write-down related to the acquisition of Enterprise Oil in 2002. These offset a 35 per cent rise in oil prices and 5 per cent rise in gas prices.

While most of the big oil companies are struggling with production, Shell appeared to be in a particularly difficult position.

BP said this week that its production would have fallen 7 per cent during the quarter without the contribution of its new partnership with Russia’s TNK and its acquisition of Slavneft.

However, production at BP is expected to be flat for the whole of 2004, even excluding Russia, and should grow in the next two years.

By contrast, Shell warned yesterday that production growth would be flat “at best” through to 2006 after a decline this year. According to analysts, the quick fix would be acquisitions but, with oil prices as high as they are, Shell said it is particularly difficult to find assets that create value.

A strategic review in September had been planned to show investors how it intended to solve these problems but it is likely to need a big increase in capital expenditure.

The company increased its interim dividend yesterday by 1.4 per cent to €0.75 per share for Dutch shareholders and 2.5 per cent to 6.25p per share for UK investors.

Shell also said it was looking to sell or spin off its Basell chemicals joint venture with BASF.

© Copyright The Financial Times Ltd

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