Replies to post #697 on The Rising Influence of Rising Affluence

[DewDiligence]

Here’s more on Shell’s shaky cash-flow math (i.e. why it's
been borrowing to fund cap-ex and the outsized dividend).

http://online.wsj.com/article/SB10001424052748703734504575125993600959692.html

›Still Not Sure of Shell

MARCH 16, 2010, 4:47 P.M. ET
By MATTHEW CURTIN

For Royal Dutch Shell investors, a hallelujah moment? Chief Executive Peter Voser reckons that by 2012, the oil giant may finally have enough cash to cover its huge capital-expenditure plans, increase output, maintain refineries, grow its dividend and still have some to spare. That would be a moment to savor after years of disappointment.

Of course, Shell has a history of flattering to deceive. And the scale of the challenge is daunting. In 2009, Shell generated $24 billion in operating cash flow excluding working-capital adjustments, yet invested $31 billion in capital expenditures and paid out $11 billion in dividends. As a result, net debt rose to $25 billion at the end of 2009 from $8 billion a year earlier.

Mr. Voser hopes high oil prices will do much of the hard work of eliminating the $17 billion shortfall. Shell is well geared to higher oil prices, thanks to investment in a number of megaprojects. Shell reckons annual output will increase to 3.5 million barrels of oil equivalent by 2012, up 11% from 2009, equivalent to compound annual growth of more than 3%. BP's medium-term target is growth of 1% to 2%. Only BG Group has a better outlook among international energy companies, according to Goldman Sachs.

At the current oil price of roughly $80 a barrel, Shell reckons operating cash flow should rise to $43 billion in 2012. Combined with lower capital expenditure, forecast to fall to $28 billion in 2010 and average between $25 billion and $30 billion until 2014, plus $1 billion to $3 billion of planned sales of refining assets, that should comfortably cover the dividend. But if oil falls back to $60 a barrel, the position will be much tighter.

That leaves Shell vulnerable to slow economic growth, hiccups in asset sales, and cost inflation. The gloomy near-term outlook for gas prices, gas demand and refining margins will also strain cash flow. Hence Shell's new dividend policy, which ties the payout to earnings and cash flow rather than developed world inflation but comes with an offer of a scrip alternative to help conserve cash. Mr. Voser's confidence clearly has its limits.‹

[DewDiligence]

MS upgrades Shell to equal-weight:

http://www.marketwatch.com/story/royal-dutch-shell-upgraded-at-morgan-stanley-2010-12-08

Morgan Stanley on Wednesday lifted its rating on Royal Dutch Shell to equal-weight from underweight, saying there is scope for a three-fold increase in the oil giant's existing $7 billion to $8 billion disposal program.

The broker said a recent deal to sell a big chunk of the company's stake in Australian exploration group Woodside "indicated a ruthlessness we have not previously seen." Morgan Stanley also said that it has renewed confidence that Shell will exceed expectations on free-cash-flow generation.

Not exactly a ringing endorsement, but Shell will take it.

[DewDiligence]

Steady with Shell, or Buzz from BP?

[For related posts on Shell, please see #msg-58951236, #msg-48048937, #msg-47908658, and #msg-49175823.]

http://blogs.wsj.com/source/2011/02/03/go-steady-with-shell-or-get-a-buzz-from-bp

›February 3, 2011, 12:56 PM GMT
By James Herron

Sometimes equity markets have a sick sense of humor.

On Tuesday, troubled oil giant BP posted zero growth in fourth quarter adjusted profit, said its oil and gas output had plunged by more than 9% and had a major Russian exploration deal halted by a court order. Its shares closed just over 1% higher.

On Thursday, BP rival Royal Dutch Shell grew its adjusted profit for the quarter by almost 50%, produced 5% more oil and gas and said its flagship gas projects in Qatar were starting up exactly on schedule. Its shares fell more than 3%.

This reaction seems all the more perverse when you consider that both companies posted a similar performance relative to analysts’ expectations—each undershooting by a bit more than 10%. But it demonstrates the divergent paths the two oil giants are taking in the wake of the Deepwater Horizon oil spill and how investors are coming to regard them differently.

Shell continues very much along the traditional path of Big Oil–focusing on growing output, trimming costs and paying out huge dividends every quarter like clockwork. BP has boldly turned off that beaten path by selling major chunks of its assets, ditching production targets, slashing its dividend and cutting risky deals with the Russians.

This could turn BP into what some analysts believe will make it faster growing and, dare I say it, more exciting than its rival.

BP’s woes are well known. It has written off $40 billion for the Deepwater Horizon disaster–pushing it to its first annual loss in 20 years–and has been forced to sell off up to $30 billion of oil and gas production assets and half its U.S. refining capacity to cover that cost. Because of this action, BP’s all-important production rate is plunging just as the oil price hits $100 per barrel again. It produced 15% less oil and gas in 2011 than in the year before the disaster.

This is in stark contrast to Shell, which is just emerging from a successful restructuring and is set to reap the rewards of major long-term investments over the next couple of years [e.g. #msg-49175823]. By 2012 it expects its production to have grown by 11% from 2009 and its cash flow to be a whopping 80% higher, even if the oil price were to fall back to $80 a barrel.

Shell will also continue to pay a quarterly dividend of 42 cents a share, giving a yield of 4.5%. BP, after nine months of paying no dividend at all, will now give investors just 7 cents a share, half the pre-spill level, for a yield of 3.6%.

If there ever was an investment no brainer, you’d think this would be it.

“Shell is yielding nearer 4.5% without any of the legal risks that BP still has to face in the U.S.,” said ING analyst Jason Kenney. “Essentially, Shell looks lower risk and higher return from an income fund perspective.”

However, it is important to remember that once BP completes its current painful downsizing, its dividend growth prospects are better than that of Shell, Kenney said. There is also, “a potential wall of cash that is possible for BP by end 2013 due to U.S. escrow commitments ending, partner cost recovery, further divestment income and the benefits of superior growth,” he said.

BP’s new venture to explore for oil in Russia’s Arctic in partnership with Rosneft, assuming the deal isn’t blocked by the troublesome Russian partners in TNK-BP, also offers more tantalizing growth prospects into the long-term than are apparent from Shell’s pact with Gazprom. And although BP CEO Bob Dudley’s bold moves since Deepwater Horizon carry their risks, they certainly make a compelling story for investors to get behind.

BP may not be so tempting to the income funds that love Shell’s yield, but others seem to like its prospects.‹

[DewDiligence]

Shell Presents Investment Case

[This PR was issued in conjunction with Shell’s Investor Day webcast on 3/15/11. The webcast slides (48 pages) are at http://www-static.shell.com/static/investor/downloads/news_and_library/2011_strategy_webcast_analyst_presentation.pdf .

Shell says it will boost upstream production from 3.3M boe/d currently to 3.7M boe/d in 2014 (an increase of 12%) thanks to such projects as the Pearl GTL plant in Qatar (#msg-49175823). Shell will spend $25-27B per year in cap-ex in order to achieve this goal.

Almost two years after the current CEO assumed the reins (#msg-39116680), Shell continues to cut fat from its corporate overhead, as detailed in this PR; the obvious question is: Why are these cuts taking so long to carry out? In the meantime, Shell continues to offer a fat dividend yield even as it borrows money to fund it (#msg-48048937).

All told, Shell is a solid if somewhat stodgy holding, IMO. You probably won’t do badly by owning it, but there are other names in the oil industry I prefer: CVX and XOM among the super-majors, HES among the independents, and CLB among the oil-service companies.]

http://www.shell.com/home/content/investor/news_and_library/2011_media_releases/2011_strategy_update_15032011.html

›15-Mar-2011

At its annual Investor Day in London today, Shell will highlight progress on its strategic plan to deliver profitable growth for shareholders.

Rapid economic development in non-OECD countries is driving sustained, and long term demand growth for all forms of energy. Regulatory and political uncertainties are adding to price and cost volatility in this long term trend.

In this era of ‘volatile transitions’, Shell is in the midst of an ambitious phase of new growth investment, developing new sources of energy. Shell’s activities provide low cost, safe and reliable energy supplies for our customers, world-wide.

Shell’s three-year strategic plan, outlined a year ago, is building the foundations for profitable growth for shareholders in the future. We are improving near-term competitive performance, and delivering a new wave of production growth.

For the next wave of growth, to 2020 we have over 30 new projects on the drawing board which will generate new options for the medium term, for the integrated energy company of the future.

Chief Executive Officer Peter Voser commented. “We have made good progress in 2010. Our profitability is improving, and we are on track for our growth targets. There is more to come from Shell.”

Shell is on track to deliver its strategic targets by 2012, namely for a 50-80% increase in cashflow from operations 2009-2012, in $60-$80 oil price and improved Downstream and natural gas environment. These targets were defined in early 2010 against the context of the global economic downturn, in order to generate surplus cashflow for shareholders through-cycle. The targets are underpinned by one of the most substantial portfolios of new oil & gas projects in our industry today.

In the first year of delivery against this three year strategic plan – 2010 – Shell saw some $10 billion, or 40% improvement in operating cashflow to $33 billion, lower costs, higher oil & gas production, and continued progress with Downstream restructuring. This was a strong all-round performance in 2010.

Key points from Shell’s annual strategy update

Performance focus

Cost reduction and operating efficiency are a key part of Shell’s business, to ensure profitability for our shareholders and competitive energy prices for our customers. As a result of Shell’s actions, underlying costs fell by $2 billion in 2010, with further scope for multi-billion dollar underlying cost reductions in 2011-12 through continuous improvement programmes.

Shell continues to sell non-core positions to enhance capital efficiency, and as part of funding for future investment. Asset sales proceeds have exceeded $30 billion in the last five years, and are expected to be up to $5 billion in 2011.

Downstream remains an important business for Shell, generating over $21 billion of free cashflow in the last five years, from a leading global portfolio. The company is redoubling its efforts to improve returns in Downstream. The bulk of the 2010-12 asset sales programme in Downstream has been completed, with transactions since end-2009 reducing refining capacity by over 700,000 b/d, reducing our marketing footprint, and generating $4.7 billion of disposals proceeds, including the recently-announced disposal plans for UK refining and Africa marketing.

Programmes to streamline the global Downstream organization continue, with more than $2.5 billion of cost take out in 2009 and 2010, and a new target for a further $1 billion Downstream cost reduction for 2011-12 announced today. This, combined with the benefits of improved operating performance and selective growth should deliver attractive returns across the cycle.

New wave of production growth

As a result of its sustained growth investment, Shell has delivered an organic Reserve Replacement Ratio of 133% for 2010, and a total proved reserves to production ratio of 11.5 years (for further information see Reserves Supplement).

New Upstream start-ups increased Shell’s 2010 resources on stream to 10 billion boe, a headline increase of 1 billion boe, in a portfolio that produced some 1.2 billion boe in 2010. New investment decisions, such as Mars B in the Gulf of Mexico, maintained Shell’s resources base for new projects under construction at 11 billion. The company has 20 new upstream projects under construction, which will add over 800,000 boe/d, driving the target for 3.5 million boe/d of production for 2012, a 6% increase compared to 2010.

Shell has today set a new target for 3.7 million boe/d of production for 2014, an increase of some 12% from 2010 levels, amongst the highest growth rates in our sector.

Maturing next generation of project options

2010 exploration & appraisal activity added some 2.3 billion boe of new resources, at a competitive cost of less than $2/boe. Discoveries in the Gulf of Mexico and Australia, and successful wells in North America tight gas underpin this 2010 performance.

In 2010, acquisitions and business development added further potential resources, in the US Marcellus tight gas and Eagle Ford liquids-rich shale gas, Iraq oil, and Australia coal bed methane.

Shell has negotiated agreements with three National Oil Companies in 2010 – in China, Qatar and Saudi Arabia – covering new natural gas potential, and continuing Shell’s long history of partnering with National Oil Companies.

Shell believes that its current Upstream portfolio can support growth to 2020, with studies underway on over 10 billion boe of resources, an increase of some 2 billion boe from 2009 levels. Shell is assessing over 30 new projects with production potential of over 1 million boe/d, and maturing further options, spanning activities in tight gas, deep water, LNG and traditional resources, in a world-wide, and industry-leading portfolio.

Outlook

Shell expects over $100 billion of net capital investment for 2011-14, some $25-$27 billion per year, in line with previous guidance, to underpin the Upstream growth profile, and Shell’s Downstream strategy.

2011 has started well, with the start up of new LNG at Qatargas 4, and the restart of refinery catalytic crackers at the Port Arthur at end-2010 and at Pernis in February 2011. These projects, combined with the expected 2011 start-up of Pearl gas-to-liquids in Qatar [Pearl will generate 360K boe/d at its peak (#msg-49175823)], and new oil sands upgrading capacity in Canada, underpin Shell’s production and financial growth targets for 2012.

Shell continues to mature new options for future growth investment, with plans to drill 25 high potential exploration wells in 2011. The company is planning to take final investment decision on some 10 new projects in 2011-12, including Prelude Floating LNG in Australia, debottlenecking of the AOSP project in Canada oil sands, and deep water oil & gas developments at the Cardamon discovery in the Gulf of Mexico and at Malikai in Malaysia.

Supplement: Reserves update

On an SEC basis, Shell in 2010 added 1,370 million boe of proved oil and gas reserves before production, of which 1,197 million boe comes from Shell subsidiaries and 173 million boe is associated with the Shell share of equity accounted investments. With 2010 production of 1,242 million boe, our headline Reserves Replacement Ratio was 110%. Organic Reserves Replacement Ratio, which excludes the impact of oil price movements in the year, acquisitions and divestments, was 133%.

Reserves additions in 2010 include 113 million boe in additions from new fields in North America, Asia, Europe, Africa and Oceania. Proved reserves additions were made across the global Shell portfolio.

At end 2010, net proved reserves attributable to Shell shareholders were 14,249 million boe, an increase of 117 million boe from end-2009, after taking into account 2010 production. As a consequence, Shell’s reserves to production ratio was 11.5 years at the end of 2010.

Further information is provided in our Annual Report and 20F, which has been filed today.

Video webcasts for media and analysts

Peter Voser, Chief Executive Officer of Royal Dutch Shell will host two live video webcasts of the 2011 Strategy Update on Tuesday March 15, 2011; a webcast for media and a webcast for analysts.‹