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Lower Prices Hit Royal Dutch Shell

Zacks Equity Research

Europe’s largest oil company Royal Dutch Shell plc (RDS.A) reported weaker-than-expected fourth quarter 2012 earnings, pulled down by depressed North American fuel prices.

Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $1.78, below the Zacks Consensus Estimate of $2.11.

However, comparing year over year, Shell’s adjusted earnings per ADR improved 14.8% (from $1.55 to $1.78), while revenues were up 2.1% to $118.0 billion, reflecting stronger refining margins.

The Hague-based group is the first of the integrated supermajors to come out with fourth quarter results. U.S. biggie Exxon Mobil Corp. (XOM) is scheduled to report tomorrow, while continental rival BP plc (BP) will release results next week.

For its fiscal year ended Dec 31, 2012, Shell reported profit (excluding one-time items and inventory changes) of $8.02 per ADR, failing to match the Zacks Consensus Estimate of $8.48 per ADR but up from $7.94 per ADR in 2011. Revenues of $467.2 billion were 0.6% down from the year-ago period.

Segmental Performance

Upstream: Upstream segment earnings during the quarter (excluding items) were $4.4 billion, down 14.3% from $5.1 billion (adjusted) earned in the year-ago period.

This primarily reflects the impact of lower liquids realizations in North America, higher depreciation and exploration expenses, together with increased operating costs. These factors were partly offset by higher contribution from Integrated Gas, improved equity LNG pricing and output, and an increase in LNG trading contributions.

Upstream volumes averaged 3.4 million oil-equivalent barrels per day (MMBOE/d), up 3.3% from the year-ago period. Natural gas volumes rose 6.8%, while crude oil output remained almost flat from the corresponding period last year. Crude oil contributed approximately 48% of total volumes, while natural gas accounted for the rest.

Production during the quarter compared with the year-ago quarter included volumes from new field start-ups and the continued ramp-up of existing fields, which boosted output by roughly 235 MBOE/d.

Shell’s worldwide realized liquids prices were 1% below the year-earlier level, while natural gas realizations increased by 3%. However, natural gas prices in North America fell 4% from the last year’s level.

LNG equity sales volumes of 5.49 million tons were 13% higher than the year-ago quarter, mainly due to contribution from the Pluto LNG development in Australia and higher output from the Qatargas 4 project.

Downstream: In the Downstream segment, the Anglo-Dutch super-major recorded a profit (excluding items) of $1.2 billion as against a loss of $278 million in the year-ago period. The turnaround reflects the impacts of higher refining profitability, the company’s improved operating efficiency and solid marketing and trading contributions.

To some extent, these factors were offset by lower Chemical earnings.  

Cash Flow

During the quarter under review, the group generated cash flow from operations of $9.9 billion, returned $3.3 billion to shareholders through dividends/share buybacks and spent $12.8 billion on capital projects.

More importantly, Shell announced that it expects to hike its dividend by 4.7% from next quarter

Balance Sheet

As of Dec 31, 2012, the group had $18.6 billion in cash and $37.8 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 9.2%.

Zacks Rank

Royal Dutch Shell currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at Total SA (TOT) as an attractive investment. The France-based supermajor – sporting a Zacks Rank #1 (Strong Buy) – offers tremendous value and is worth accumulating at current levels.

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