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Shell profit doubles but shares fall on production problems

The Telegraph

Friday 04 February 2011

Despite higher oil prices helping double profits at Royal Dutch Shell this year, the energy giant’s share price has sunk 3pc on production problems and delays to its US Arctic drilling.

Shell has seen a number of major projects from Qatar to Brazil start producing oil and gas this year, lifting output and revenue Photo: Andrew Crowley
Rowena Mason
By Rowena Mason 7:00AM GMT 04 Feb 2011

The Anglo-Dutch company made profits of $18.6bn (£11.5bn) on a cost of supply basis, which strips out the effects of inventory changes.

For the fourth quarter, its profits were $5.7bn – up from $1.2bn a year ago – but below analysts’ expectations. This sent its share price down 75½, or 3pc, to £21.75½.

Shell has seen a number of major projects from Qatar to Brazil start producing oil and gas this year, lifting output and revenue. Production for the year rose 6pc to 3.3m barrels per day, up from 3.1m a year earlier.

However, output was not as high as expected because of maintenance programmes, and profitability was also affected by lower gas prices in the US.

“Fourth-quarter and full-year 2010 earnings were supported by higher oil prices and chemicals margins,” said Peter Voser, chief executive of Shell. “However, our earnings were impacted by weak refining margins, pressure on certain regional natural gas prices, and volatility in downstream marketing margins as a result of rising oil prices.”

Investors were also disappointed that Shell has not been able to gain permits to drill in the Arctic because of regulatory worries following BP’s Gulf of Mexico oil disaster. It will now not drill until 2012 at the earliest, having planned to start in July last year and then July this year.

Mr Voser said Shell is confident it is still worth drilling in the environmentally-sensitive region.

“There will be challenges. Yes, we believe we can do it and yes, we believe that strategically the Arctic is an area of significant interest and opportunity for Shell,” he said.

Mr Voser added that there is “more to come from Shell” following a management shake-up that has seen 7,000 job losses and a renewed focus on building production.

The company’s dividend will be 42 cents per share for the fourth quarter of 2010 and Shell guided that it is likely to be the same for the first quarter of this year.

Shell had been lagging BP until the Gulf of Mexico oil spill hit its nearest rival’s profitability and caused its dividend to be cancelled, then reinstated at half the previous level. On Tuesday, BP reported an annual loss of $4.9bn and fourth quarter profits of $4.6bn, while warning production would be 11pc lower.

The reaction from the City to Shell’s results was mixed, with Collins Stewart analysts Gordon Gray and James Evans arguing that the results were “disappointing” but the shares remain “attractive”.

“Shell’s results were disappointing but we see nothing in the figures which gives us concern over the company’s growth prospects, and 2010 has seen strong progress towards Shell’s strategic targets on volumes and cash flow,” they said.

“We recommend buying into any results-driven weakness as we continue to see the strongest turnaround in free cash flow in the sector on a one to two-year view, and we still think valuations are attractive.”



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