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THE NEW YORK TIMES: Shell Profit Beats Forecasts, More Reserves Worries

Shell Profit Beats Forecasts, More Reserves Worries

By REUTERS
Published: May 4, 2006

Filed at 5:43 a.m. ET

LONDON (Reuters) – Royal Dutch Shell Plc (RDSa.L) reported a bigger-than-expected rise in first-quarter profit on Thursday, paving the way for higher share buybacks, but the results were tempered by more bad news on the reserves front.

Shell said in a statement that strong oil prices lifted current cost of supply net income, which strips out changes in the value of inventories, 12 percent to $6.1 billion.

“These are good, solid underlying results and better than we have expected,'' said Peter Hutton at van Lanschot Bankiers.

Shell's London-listed “A'' shares were up 1 percent at 1879 pence at 0900 GMT, slightly ahead of a 0.9 percent rise in the DJ Stoxx European oil and gas sector index (.SXEP).

Shell's profit rise beat larger rival Exxon Mobil Corp. (XOM.N), which posted a 7 percent rise in first-quarter profit, and London-based BP Plc (BP.L), whose underlying profits rose 7 percent.

The result was mainly powered by higher prices, as oil and gas production fell 3 percent from the same period last year to 3.746 million barrels of oil equivalent per day (boepd), although this was also ahead of analysts' forecasts.

Shell said it was losing 165,000 boepd due to attacks on its Nigerian operations and that damage from hurricanes in the Gulf of Mexico last year still weighed on output.

Excluding a non-operating gain of $113 million, the first-quarter result was $5.975 billion, beating an average forecast of $5.56 billion in a Reuters poll of seven analysts.

Anglo-Dutch Shell said roaring earnings on the back of high energy prices should allow it to exceed previous guidance for up to $5 billion of share buy-backs in 2006.

LESS CONFIDENT ON RESERVES

Shell said it was now less likely to achieve a 100 percent reserve replacement target — the level at which production is matched equally by new finds — over the 2004-2008 period.

After a reserves overbooking scandal in 2004, Shell's industry-lagging record at finding oil and gas has been a major concern for investors, but market reaction was balanced by the fact many had expected Shell would not meet the target.

Shell blamed this on tight markets and soaring prices for oil services and supplies, which would force it to scale back some projects.

“We expect this to also have implications for volume growth,'' Citigroup said in a research note.

Nonetheless, Shell said it might still be possible to reach the reserves target.

“We still have a fair prospect of achieving that target,'' Chief Executive Jeroen van der Veer said.

The company's efforts to do so will not be cheap. The company forecast a rise in its capital expenditure budget to $21 billion in 2007, from an expected $19 billion this year and around $15 billion in 2005.

The higher profits Shell earned on extracting and selling oil and gas were countered by lower earnings at its refining and marketing unit.

The fall partly reflects a big one-off gain last year due to asset sales, but margins and throughput also fell.

Shell's outperformance of expectations was partly due to strong profit at its gas and power unit, reflecting strong demand for liquefied natural gas, which is cooled to liquid form so it can be transported in tankers.

Shell boosted its dividend 9 percent to 0.25 euros per share.

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