Replies to post #4233 on 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.‹

[DewDiligence]

Shell Moves Closer to Start of Chukchi Drilling

[The BOEM approval in Dec 2011 (#msg-70043996), although presented in the mainstream press as “final,” was actually contingent on Shell’s submission of a spill-mitigation plan, which has now been done. The remaining regulatory approvals to begin drilling would seem to be no problem, although one cannot entirely dismiss the possibility that some judge will impose an injunction in response to an “emergency” lawsuit by environmentalists.

The Chukchi wells Shell plans to drill are in *shallow* water (140 feet)—what makes them technically challenging is the frigidity of the arctic, not the depth.

Shell has included zero boe/d from the Chukchi or Beaufort Seas in its 2017-2018 production guidance of 4M boe/d (#msg-71742179), so whatever Shell manages to get from these projects is all upside.]

http://www.nytimes.com/2012/02/18/science/earth/us-tentatively-approves-shell-spill-plan-for-new-arctic-drilling.html

›By JOHN M. BRODER and CLIFFORD KRAUSS
February 18, 2012

In a crucial step toward the ultimate approval of new oil drilling off the North Slope of Alaska, the Interior Department on Friday tentatively approved Shell’s plans for responding to a potential spill in the frigid Arctic waters.

Shell still needs to cross several more regulatory barriers before it will be permitted to begin drilling as many as six exploratory wells in the Chukchi Sea in July. But the green light from the Interior Department on the company’s oil spill response plan is a clear sign that the Obama administration is disposed toward allowing the drilling despite the dogged opposition of many environmentalists.

“Alaska’s energy resources — onshore and offshore, conventional and renewable — hold great promise and economic opportunity for the people of Alaska and across the nation,” Interior Secretary Ken Salazar said in a statement. “In the Arctic frontier, cautious exploration — under the strongest oversight, safety requirements and emergency response plans ever established — can help us expand our understanding of the area and its resources, and support our goal of continuing to increase safe and responsible domestic oil and gas production.”

“We are taking a cautious approach, one that will help inform the wise decisions of tomorrow,” Mr. Salazar said.

Shell has spent more than $4 billion over five years in its quest to exploit the vast oil and natural gas resources believed to lie beneath the Beaufort and Chukchi Seas off the north coast of Alaska. It has faced opposition from environmental groups and Alaska Natives who worry that extensive petroleum activities will foul the pristine seas and harm wildlife, including bowhead whales, ice seals, polar bears and walruses. Such environmental groups are likely to try to block any drilling in court if final federal approval is granted in coming months.

“We’re disappointed but not surprised,” said Brendan Cummings, senior counsel for the Center for Biological Diversity, an environmental group long opposed to Shell’s drilling plans. “I don’t see any way the Interior Department could be deemed in compliance with the law. There’s a lack of infrastructure and insufficient demonstrated ability to clean up in the Arctic. It’s likely that this approval will be challenged in court.”

Shell has proposed drilling up to six wells over the next two years within the Burger prospect, about 70 miles off the coast in approximately 140 feet of water.

Shell welcomed the decision, describing it as a “major milestone” in its plans to drill off the Alaska shoreline.

“We recognize that industry’s license to operate in the offshore is predicated on being able to operate in a safe, environmentally sound manner,” said Pete Slaiby, Shell’s top executive in Alaska. “Shell’s commitment to those basic principles is unwavering.”

Shell still must obtain permits from the Environmental Protection Agency for wastewater discharge and from the Interior Department’s Bureau of Safety and Environmental Enforcement to drill each specific well. The company must also demonstrate that its well-capping technology can work in the harsh conditions of the Arctic, and its drilling program must survive any court challenges.

Opponents said that Shell and the Obama administration had not fully absorbed the lessons of the 2010 Deepwater Horizon blowout and oil spill in the Gulf of Mexico, which killed 11 rig workers and spilled millions of gallons of crude into the gulf.

“This decision is premature,” said Marilyn Heiman, director of the Arctic program at the Pew Environment Group. “We need an additional two or three years of study to get the science right, to ensure proper monitoring and to protect wildlife.”

Ms. Heiman added, “They still don’t have standards for the Arctic, which is very different from the temperate waters of the gulf — the ice, the wind, the darkness. We think there are major gaps in this plan, and they need to take more time.”

Interior Department officials insisted that they had conducted an extensive scientific inquiry before moving ahead with the spill response plan. They also said this work would continue before and after Shell was allowed out on the water and that officials would conduct several spill response drills before any drilling began.

They have also shortened the season that Shell will be allowed to operate offshore to ensure that it has shut down operations and has time to take any remedial actions before ice forms in the Chukchi.

“This decision has been based on our new standards and our commitment to ensure the highest standard of safety and environmental preparedness in the world and our commitment to bringing science to all our activities in the Arctic,” said David J. Hayes, the Interior deputy secretary who is coordinating the Arctic offshore drilling policy.

Shell’s response plan is designed to ensure that in case of a blowout or spill, the well could be shut down and any oil discharged quickly contained. If necessary, and with approval, spilled oil could also be burned off. The company promises to have personnel and equipment specifically dedicated to spill control near the rigs at all times.

Boats, skimmers, booms, helicopters and barges will be on hand or at most an hour away from drilling rigs in case of an emergency. The equipment will all be specifically designed for harsh Arctic conditions, with reinforced hulls and materials designed for subfreezing weather. One skimmer, the 300-foot Nanuq, will be able to store 12,000 barrels of oil, and a tanker will have a 513,000-barrel capacity.

A separate rig would be available to come from nearby waters in case a relief well needed to be drilled to intercept and seal a leaking well.

The company says its blowout preventers are designed to close a well within seconds, and, learning from the BP disaster, the preventers have been enhanced with an additional set of shear rams. Tests will be done weekly. Shell also promises that its underwater capping system will be able to quickly close a leaking wellhead.‹

[DewDiligence]

Qatar buys 3-5% equity stake in Shell—i.e. in the company itself:

http://news.investors.com/article/611113/201205111317/shell-sells-stake-to-qatar.htm

The exact terms haven’t yet been publicly disclosed, but Shell confirmed the transaction. After the purchase, Qatar will be Shell’s largest single shareholder despite the relatively small % stake.

[DewDiligence]

Shell acquires Texas acreage from CHK for $1.94B:

http://finance.yahoo.com/news/rds-acquires-liquids-rich-shale-112400412.html

This announcement supports Shell's strategy of further building an industry-leading liquids-rich shale resource… The acquisition covers 618,000 net acres in the Permian Basin in West Texas that currently produces some 26,000 barrels of oil equivalent per day and has significant growth potential. Please refer to http://www.shell.com/investor for the map of the acreage.