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Shell’s Bump in the Road



Bump in the road, or grinding halt? Royal Dutch Shell is confident its $4.1 billion fourth-quarter earnings will prove the former despite falling 13% below expectations, which it blamed on poor performance in its refining business. That obscured an encouraging improvement in the oil major’s return on capital. But investors hoping this will soon translate into higher dividends may now have to wait a bit longer.

Shell’s return on capital improved to 11.5% in 2010 from 8.5% the year before, boosted by a 5% rise in oil and gas production and cost cuts on target at $2 billion. Key gas projects in Qatar should help keep production stable and cash flow heading upwards this year, despite delays to its drilling plans in Alaska and the Gulf of Mexico.

That general trend should soothe concerns about the poor refining result, which Shell put down to maintenance costs, narrowing margins and exchange-rate movements. Still, the refining slippage has likely delayed Shell from returning more cash to investors. Shell forecasts operating cash flow of $36 billion to $43 billion by 2012, on a forecast oil price range of $60 to $80 per barrel, well above net capital expenditure expected at $25 billion to $30 billion annually out to 2014. That implies plenty of scope to grow the dividend.

Caution is the watchword for now, however. Operating cash flow of $27.4 billion in 2010 was still 24% short of Shell’s 2012 target. Shell has already announced the dividend will be flat for the first quarter of 2011: It will likely wait until later in the year, when sales progress from its Qatar LNG projects and the path of oil prices is clearer, before considering any increase, which may now have to wait until 2012.

With production output also likely to be flat on-year, 2011 is shaping up as a solid-but-unspectacular year for Shell. The small premium the stock trades at compared with its European peers—11.1 times forecast 2011 earnings—may not widen much further.

Write to Andrew Peaple at [email protected]


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