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Shell eyes big growth, but at big cost

Thu Feb 2, 2012 3:45am EST

* Fourth quarter results disappoint

* Anaemic dividend rise

* Higher investments seen but returns weaken

* Shares drop

By Tom Bergin

LONDON, Feb 2 (Reuters) – Royal Dutch Shell said it was targeting aggressive growth in the coming years, with the start-up of big new projects and higher investments set to drive a 50 percent rise in cashflow and a 25 percent rise in oil and gas production.

However, weaker-than-expected results for the fourth quarter, partly due to dismal industry-wide refining margins, and an anaemic dividend hike, raised the question of whether Shell was simply running faster to stand still, with investments offering ever-dwindling returns.

Shell’s London-listed A shares traded down 2.2 percent at 0826 GMT, lagging a 0.8 percent drop in the STOXX Europe 600 Oil and Gas index.

Hague-based Shell said it was eyeing a return to strong production growth in the coming years, after nearly a decade. Apart from a 5 percent rise in 2010, the group’s production has fallen every year since 2002.

“Oil & gas production should average some 4 million boe/d (barrels of oil equivalent per day) in 2017-18,” the company said in a statement.

Production averaged 3.215 million boe/d in 2011, a 3 percent drop on 2010.

This growth will be generated by higher capital investment expenditure, which will rise to $32-$33 billion this year from $31.5 billion last year, Shell said.

Analysts had previously predicted that capex would fall, as Shell completed the big new projects such as the pearl gas-to-liquids plant in Qatar, which will push output higher.

The high capital being invested is one reason that Shell’s return on capital employed failed to sparkle, at 15.9 percent, compared to levels above 20 percent a few years back when oil prices were considerably lower.

Similarly, in spite of a record average Brent crude price of $111/barrel in 2011, the full year current cost of supply (CCS) net income of $28.6 billion still lagged the earnings high Shell reported in 2008, of $31.4 billion.


Shell said its fourth quarter CCS net income was $6.46 billion, helped by one-off gains from the sale of assets.

Excluding one-offs, the result rose 18 percent to $4.85 billion, shy of an average forecast of $5.17 billion from a Reuters poll of nine analysts.

The miss is despite the fact analysts had recently cut back their forecasts in the light of weak trading statements from Shell’s rivals.

CCS earnings strip out unrealised gains or losses related to changes in the value of inventories, and as such are comparable with net income under U.S. accounting rules.

The company also announced a weaker rise in its dividend than some analysts expected, adding just 1 cent to its first quarter dividend for 2012, to $0.43 per share.


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