The Rising Influence of Rising Affluence

[DewDiligence]

Shell Stays Steady Amid Volatility

[This is the WSJ’s take on Shell’s 4Q11 results and the 2012-2015 outlook described in #msg-71742179. CCS EPS per ADR excluding extraordinary items—the equivalent of “non-GAAP” earnings for US companies—was $1.56 for 4Q11 and $7.94 for the full year 2011. (1 ADR = 2 ordinary shares.) Thus, at the current share prices, RDS-A and RDS-B are selling for only 9x 2011 EPS, which is pretty darn cheap, IMO. (Shell does not give forward EPS guidance.)

This article has a shocking number of factual misstatements; I’ve noted a few of them in the bracketed comments below. Moral: don’t believe something just because you read it in the WSJ!]

http://online.wsj.com/article/SB10001424052970203711104577198311960723928.html

›FEBRUARY 2, 2012, 4:43 P.M. ET
By ALEXIS FLYNN

LONDON—Royal Dutch Shell PLC on Thursday reported lackluster fourth-quarter results and warned of economic volatility ahead, but Shell's top executives remained bullish about its growth prospects, reiterating their commitment to ambitious spending plans.

The Anglo-Dutch energy company posted a profit of $6.5 billion, down 4% from $6.79 billion a year earlier. [The earnings figure that all investors and analysts care about is the so-called CCS number, below.] The clean current cost of supplies, a closely watched figure that strips out gains or losses from inventories and other non-operating items, was $4.85 billion, compared with $4.11 billion in the fourth quarter of 2010. This was below analyst expectations of $5.16 billion.

Citing the "sharp downturn" in refining margins and weak natural-gas prices, Chief Executive Peter Voser said "the global economy and energy markets are likely to see continued high volatility."

Group revenue was $119.13 billion, compared with $105.53 billion a year earlier. Diluted earnings per share fell to $1.04 from $1.10 [i.e. $2.08 per ADR since 1 ADR = 2 ordinary shares; the $2.08 figure is an all-in item including extraordinary items—the corresponding figure excluding such items was $1.56 for 4Q11 and $7.94 for the full year 2011].

Shell's results followed similar reports by U.S. oil majors, which have reported billions of dollars in profits but have cited the same weak fundamentals in petroleum refining and U.S. natural gas.

Shell, Europe's largest oil company and the first to report full-year results, also laid out an aggressive medium-term growth plan along with its results, saying it expects to improve operational cash flow by 30% to 50% through to 2015, compared with the past three years [this is wrong—the actual comparison Shell is making is the next four years (2012-2015) vs the previous *four* years (2008-2011), not the previous three years], as well as boost overall production to four million barrels of oil equivalent a day by 2014 [wrong again—the 4M boe/d projection is for 2017-2018, not 2014].

However, this planned growth means the company will have to once again raise its capital-spending commitments and is unlikely to be able to return as much money to shareholders as investors may have hoped.

Shell announced it would raise its dividend 2%—the company's first increase in three years—from next quarter, but this was lower than the 4% increase that most analysts had expected.

The company's refining and marketing division posted a loss of $244 million, compared with a profit of $411 million a year earlier. U.S. oil giants Chevron Corp. and Exxon Mobil Corp. also reported weak refining earnings. [Shell’s refining margins were particularly weak relative to competitors’ margins because Shell does not have any refineries in the US midsection that could have benefitted from the Brent-WTI differential.]

Total oil and natural-gas production was 3.3 million barrels of oil equivalent per day [in 4Q11], a decline of 5% on the year, as asset sales and the temporary shutdown of one of Shell's biggest Nigerian fields affected output. Analysts were expecting production to decline 6.4%.

"Upstream earnings held up and were reasonably robust," said Macquarie analyst Jason Gammel. "The performance of the downstream has to be set against the tough margin environment."

Shell said its ambitious growth strategy remained on track despite the weak quarter. It said it expects to improve operational cash flow by 30% to 50% through 2015 compared to the past three years.

The sentiment was echoed by Royal Bank of Canada's Peter Hutton. "The miss was very largely in the downstream, and related to volatility in fourth-quarter conditions."

However, Citigroup was less impressed by Shell's strategic outlook, highlighting the higher spending that the company plans to undertake. "Although there is perhaps a promise that the portfolio can support greater growth by 2017, that comes at the expense of yet another rise in cap-ex," said Citi in a note. [Yes, duh; it’s a matter of degree.]

Mcquarie's Mr. Gammel said Shell has an "impressive" target to increase production volumes and cash generation. However, Mr. Gammel said that given this strategic focus and the demands it would place on the company's capital needs, it was unlikely Shell would look to return much more money to shareholders in 2012. "I don't think 2% [increase in the dividend] is much to be excited about."

For the year, revenue was $484.49 billion, up from $378.15 billion in 2010. Net profit was $30.92 billion, a more than 50% increase from the previous year.‹