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Financial Times: Lex Column: Shell on a roll

Published: May 4 2007 03:00 | Last updated: May 4 2007 03:00

That’s five in a row. With its latest set of quarterly results, Royal Dutch Shell has beaten expectations once again. It had a favourable tailwind at the tax line as well as one-off gains at the corporate level. Even after stripping out the latter, however, Shell beat consensus forecasts for net income of $5.7bn handily. In spite of a 40 per cent year-on-year jump in capital expenditure, free cash flow from operations was a healthy $5.8bn.

This performance came against a tricky backdrop. Shell increased adjusted earnings by 10 per cent year on year, even as realised oil and gas prices fell slightly. Meanwhile, the northern hemisphere’s mild winter led to a 13 per cent decline in the amount of gas Shell sold globally.

In the upstream business, net income per barrel of oil equivalent held up at just more than $11, helping to offset lower volumes. Complementing this was a strong showing in the downstream, with both the chemicals and gas and power divisions doing much better than expected. Refining and marketing performed well in spite of a heavy maintenance schedule at Shell’s plants. That is important. In growing contrast to arch-rival BP, Shell predicates its strategy on a “manufacturing” approach to energy, with a bigger emphasis on downstream processing and production of unconventional fuels.

One good quarter – or even five – do not constitute a wholesale vindication of a multi-decade strategy. Shell’s bets on big integrated projects have paid off in the past – it was a pioneer of liquefied natural gas – but industry cost inflation and uncertainty over long-term oil prices present sizeable risks. Meaningful output growth in the upstream, still the dominant division, remains some way off. Still, the resilience displayed in Shell’s recent performance is welcome. And with both refining margins and crude oil prices having recovered, a sixth straight quarter of solid performance looks feasible.

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