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Analysts Cut Shell Earnings Forecast On Grim Refining

THE WALL STREET JOURNAL

JANUARY 13, 2010, 12:58 P.M. ET

By James Herron

Of DOW JONES NEWSWIRES

LONDON (Dow Jones)–Several analysts cut their earnings forecasts for Royal Dutch Shell PLC (RDSB.LN) Wednesday as an increasingly grim picture of the company’s refining and marketing operations emerged.

Brokerage Evolution Securities reduced its full year clean earnings per share estimate for Shell by 12% to $1.91. Royal Bank of Scotland cut its fourth quarter earnings estimate for the company 19% to $2.9 billion, citing “extremely weak refining margins.”

ING analyst Jason Kenney said he now expects a fourth quarter loss of $150 million in Shell’s refining and marketing division.

“We now anticipate [fourth quarter] results from the downstream business to show a quarter-on-quarter decline of 87%,” said Evolution Securities analyst Richard Griffith.

Evolution expects Shell to post a 25% year-on-year fall in clean net profit to $2.91 billion for the fourth quarter of 2009, despite a 29% rise in the price of oil from year earlier levels. “While the upstream part of Shell should have benefited from higher crude prices, the downstream business…has continued to deteriorate,” Griffith said.

Refiners are caught between crude oil prices that have soared on expectations of a global economic recovery and refined product prices that have remained low due to weak end user demand. The amount of money a refiner could earn by processing a barrel of oil in the fourth quarter of 2009 was just over a quarter of its level a year earlier, according to data from BP PLC (BP).

It’s not clear when refining proift margins could recover, because that depends on a combination of industrial demand, economic growth and employment, said Kenney. The only thing for sure is, “we’re a long way off from that,” he said.

Shell’s downstream operations are such a “dog’s dinner” that it will prevent the company posting year-on-year profit growth until the third quarter of 2010, Kenney predicted.

This is in stark contrast to BP, which Kenney expects to post a 76% year-on-year rise in fourth quarter earnings and continue this strong momentum through 2010. “BP and Shell are worlds apart,” he said.

BP is ahead of Shell because it is already reaping the benefits of a restructuring and cost cutting program started in 2007. “Shell’s ‘Transition 2009’ internal restructuring is running behind BP’s program, but appears similar in ambition and scale,” said RBS in a research note.

“Around 5,000 staff were expected to leave Shell by the end of 2009, suggesting that pre-tax cuts in operating costs of $1 billion in the first nine months of 2009 will intensify this year. Operational momentum is likely to improve in 20011-2012,” it said. RBS recommends buying Shell shares.

Shell B shares closed down 1.4%, or 25 pence, at 1798p Wednesday.

Company Web site: http://www.shell.com

-By James Herron, Dow Jones Newswires; +44 (0)20 7842 9317; [email protected]

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