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Shell’s cash flow conundrum in focus

Reuters Africa

Fri Mar 11, 2011 1:11pm GMT

* Shell strategy update due on March 15

* Oil price spike not seen affecting Shell’s plans

* Eyes on cash flows generated from projects

* Shell expected to add to investment pipeline

By Greg Roumeliotis and Alex Lawler

AMSTERDAM/LONDON, March 11 (Reuters) – Royal Dutch Shell (RDSa.L: Quote) will need to convince investors it can put growing cash flow to good use when the Anglo-Dutch oil company updates them on its strategy plans next week.

Shell is generating more cash after investing more than $100 billion in exploration and production over the last five years.

After ploughing $23.7 billion into net capital investment in 2010, the company is aiming for $25-$27 billion in 2011.

Shell reported a positive total cash flow of $3.725 billion in 2010, after investment activities absorbed less than in 2009, when it posted a negative total cash flow of $5.469 billion.

But the recent oil price spike is not expected to change these plans at Shell’s strategy update on March 15.

“What is happening now with the oil price will not make a difference, oil majors plan long-term. The focus is on production growth beyond 2012,” ABN AMRO Bank analyst Paul Andriessen said.

Shell is aiming for 2012 oil and natural gas production to be 11 percent higher than in 2009 and says this will lead to a 50 to 80 percent increase in cash flow from operations, measured at $60 to $80 per barrel oil prices.

Investors will be looking for details on its project pipeline after Shell started up six upstream and downstream schemes in 2010 and saw first offshore gas production at its Qatargas 4 LNG facility earlier this year.

“I’m looking for more detail on projects from 2015 to 2020. I don’t think there’s enough detail on the projects after this bunch,” said David Stedman, head of corporate research at Daiwa Capital Markets.

Europe’s largest oil company by market capitalisation will also be expected to give guidance on where the cash generated from newly finished projects, such as its Pearl gas-to-liquids (GTL) plant, will go.

“With the likes of Pearl GTL there’s no doubt Shell will deliver lots of cash flow. What are they doing to spend that cash flow on? How much of it goes back to shareholders,” Daiwa’s Stedman said.

After its fourth-quarter profit was hit by weak refining and downstream results, Shell may also announce new plans to lower refining capacity and limit exposure to retail markets. [ID:nLDE71209F]

“This is the window of delivery — the back end of 2011 going into 2012 — this is what it’s been all about for the last five or six years, delivering operational performance and a cash flow upside,” said ING analyst Jason Kenney.

“But the question is, what happens next,” Kenney added. (Editing by Alexander Smith)

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