The Rising Influence of Rising Affluence

[DewDiligence]

Shell Has an Increasingly Bright Future—Maybe

[Shell’s recent performance has been so dismal (#msg-46367077) that investors have a right to say, “Show me the money!” For the next two years, Shell will actually have to borrow money to pay its outsized dividend and fund its industry-leading cap-ex program, which includes $30B of expenditures in 2010 alone.]

http://online.wsj.com/article/SB20001424052748703734504575125053119345866.html

›MARCH 17, 2010
By GUY CHAZAN

Royal Dutch Shell PLC told investors Tuesday it has turned a corner after a difficult few years, predicting strong output and cash-flow growth and declaring 2009 its best year for exploration in a decade.

In its yearly strategy update, Shell said it would produce 3.5 million barrels a day of oil equivalent in 2012, 11% more than it did last year, as big-ticket projects come onstream. That is slightly more bullish than the guidance it gave a year ago and shows Shell growing at a faster rate than rival BP PLC.

The announcement reflects rising confidence at Shell less than a year after its new chief executive, Peter Voser, took the reins promising to turn around a company weighed down by sluggish growth and operational setbacks. Mr. Voser, a Swiss national and previously Shell's chief financial officer, launched a big efficiency drive, cut 5,000 jobs, shook up the company's structure and slashed costs by $2 billion. He went further Tuesday, saying 2,000 more workers would be shed by the end of 2011.

But greater efficiency hasn't yet translated into improved financial performance. Shell's profit fell sharply last year, partly a result of a refining downturn caused by overcapacity and declining demand for petroleum products in the U.S., Europe and Japan. Shell says it plans to shed 15% of its refining portfolio and leave 35% of its retail markets.

Though the outlook for its refining division remains bleak, prospects are better in the exploration and production part of its business, which has benefited from fairly strong crude prices driven by the growing thirst for oil in energy-hungry countries like China and India. Two huge projects in Qatar are due to come onstream next year which by themselves should increase output by more than 10% [#msg-43918975]: Pearl Gas-To-Liquids, which converts natural gas to transportation fuels like diesel, and a big liquefied-natural-gas project, Qatargas 4. A large expansion of Shell's oil-sands project in Canada is also starting up this year or next.

Shell now says it is confident production will keep growing for the next decade, based on 35 projects exploiting some eight billion barrels of resources. That marks a change for the Anglo-Dutch major. Its output has declined for the past seven years, and it has trailed competitors in adding new reserves to replace the oil and gas it produces.

It has now reversed that trend, with a reserve-replacement ratio for last year of 288% [obviously not a sustainable number]—much higher than peers like Exxon Mobil Corp. and BP. By comparison, Shell only replaced 98% of its production in 2008 and scored a dismal 17% in 2007.

Shell said it had its best year for exploration in a decade last year, with 2.4 billion barrels of oil equivalent discovered [much of this is NG (#msg-45326827)] in places such as Australia and the U.S. part of the Gulf of Mexico.

The company says cash flow from operations will increase by about 50% by 2012 if oil is $60 a barrel and by more than 80% with oil at $80 a barrel. It expects to move into a surplus-cash-flow position by 2012 i.e. operating cash flow will then exceed dividend payments and cap-ex requirements]. Until then, it will probably have to continue borrowing to cover capital investments and dividend payouts.‹