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The Guardian (UK): Shell profits beat expectations and fuel City’s hopes of recovery

Mark Milner
Friday October 27, 2006

Shell took the City by surprise yesterday, posting better than expected underlying profits based on high oil prices and strong output figures.

Headline profits fell from $7.2bn in the third quarter of 2005 to $6.9bn (£3.7bn) this time but were well above the $5.7bn to $6bn analysts had forecast. Shell said that, stripping out the $1.7bn gain from asset sales last year, earnings a share were up 33% on a current cost of supply basis.

“This is a good performance by the group. Our earnings have proven resilient in the face of rising industry costs and weakening refining margins,” said Shell’s chief executive, Jeroen van der Veer. “Operating performance has been satisfactory, LNG [liquefied natural gas] growth has been impressive in the quarter and our upstream volumes have grown despite shut-downs in Nigeria.”

Shell shares climbed 3% yesterday and the sector received a further boost when ExxonMobil, the world’s largest quoted oil company, also turned in better than expected profits. Though Exxon just missed breaking its profits record, set last year, the $10.5bn reported yesterday was still the second-highest quarterly profits total recorded by a US company.

Yesterday’s strong performance from Shell has boosted hopes that it is emerging from a tough period that saw it forced to downgrade its oil and gas reserves in 2004 and then report escalating development costs at the Sakhalin-2 project last year.

Some analysts have suggested Russia could be using environmental issues to pressure Shell and its partners into amending Sakhalin’s original development plan, which offers the country relatively little money until the developers have covered their costs.

Yesterday Mr van der Veer said that Russia had already received some money from Sakhalin and that it would receive $50bn at an oil price of $34 a barrel and some $80bn if oil stood at $50 a barrel.

There have also been reports that Russia could be trying to pressure Shell to provide better terms in an asset swap that would see state-controlled Gazprom take a stake in Sakhalin in exchange for Shell acquiring a holding in a Siberian field.

Mr van der Veer said Shell was continuing to hold talks with the Russians over issues arising from Sakhalin and added: “I assume by continuing to hold discussions as indicated we will come to a solution which is acceptable to both parties.”

Citigroup’s analyst Jonathan Wright said in a research note: “There is a case building for Shell to at least close the valuation gap [with BP].”

http://business.guardian.co.uk/story/0,,1932573,00.html

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