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Reuters: Shell set to post record profits

Fri Jan 26, 2007 9:37 AM GMT
By Tom Bergin

LONDON (Reuters) – Royal Dutch Shell is expected to post a 3 percent drop in its underlying fourth-quarter net profit on Thursday, due to easing oil prices and rising costs, but the oil major is still predicted to post a record-breaking $25 billion (13 billion pounds) full-year profit.

A Reuters poll of 10 analysts gave an average forecast of $5.216 billion for Shell’s fourth quarter current cost of supply (CCS) net profit, which strips out changes in the value of inventories, excluding non-operating items.

This would push annual profits at the world’s second-largest western oil company by market value to almost $25 billion — a record for a UK-listed company, analysts said.

Investors consider the pre-exceptional CCS result as the best measure of Shell’s underlying performance.

Shell’s production is expected to have been roughly flat in the quarter compared with the same period in 2005, at 3.48 million barrels of oil equivalent per day (boepd).

This result would mean output for the year fell over 2 percent as new field start-ups failed to match natural declines and disruption in Nigeria due to ethnic violence.

Oil prices fell $10 a barrel compared with the previous quarter and were up only slightly on the final quarter of 2005.

The year-on-year crude price rise is not expected to be sufficient to offset falling refining margins, rising production costs and higher taxes, as resource-holding nations seek to retain more of the upside of high oil prices for themselves.

These negative themes are expected to continue and make 2007 a tougher year for Shell and its rivals.


The Anglo-Dutch company will also provide investors with a strategy update on February 1, which analysts said would likely see Shell scale back growth targets.

Continuing ethnic strife in Nigeria is expected to keep facilities there shut for much of 2007. Deutsche Bank expects Nigeria to force Shell to lower its 2007 production guidance to around 3.4-3.6 million boepd from 3.5-3.8 million boepd.

Shell’s agreement to sell half its share in the Sakhalin-2 project in Russia will make longer term targets harder to meet. UBS said it now expected output of 3.8 million boepd in 2009 against Shell’s target of 3.8-4.0 million boepd.

The Sakhalin sale, which followed a campaign of pressure by the Russian government on the project, will also hit Shell’s reserves by around 1 billion barrels, Citigroup said.

Nonetheless, 2006 is expected to be a good year for reserves additions at Shell, after poor results in 2005 and 2004, when it was forced to admit it had exaggerated reserves substantially.

Most analysts polled said they expect Shell to keep its dividend flat compared with the previous two quarters at 0.25 euros per share but the company is cash rich after disposals including Sakhalin-2 and could boost this or raise buybacks.

Goldman Sachs estimated that if oil prices averaged $65 per barrel in 2007 Shell would have the capacity to boost buybacks to $10 billion.

Shell’s 1 percent share price rise in 2006 lagged a 4 percent rise in the DJ Stoxx European oil and gas sector index < .SXEP>. However, its performance compares with a drop in rival BP Plc’s shares.

Shell stock is trading on a price-earnings ratio of 9.38 times, based on the Reuters consensus estimate for 2007 profits, below the 10 times analysts calculate for the sector.


* Possible cut in reserves and production targets following reduction of stake in Sakhalin-2

* Exploration success – claimed “big cat” success of recent years should feed through to reserves bookings.

* Higher buybacks or dividends.

* More positive stance on acquisitions

* Some update on Nigeria

* Analysts expect any rise in Shell’s $21 billion capital investment budget should be small after earlier increases.

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