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Royal Dutch Shell Rides High Oil Price Wave to Earnings Beat

Zacks Equity Research

Europe’s largest oil company Royal Dutch Shell plc (RDS.A) reported robust second quarter earnings due to strong realizations on its lucrative crude oil exploration and production business.  

Hague-based Shell reported earnings per ADR (on a current cost of supplies basis) – excluding one-time items and gains or losses from inventories – of $1.94. This was well above the Zacks Consensus Estimate of $1.72 and the year-ago figure of $1.46.

Along with the earnings beat, Shell also decided to reward the investors by announcing $30 billion worth share buybacks and dividends for 2014 and 2015.

However, revenues were down 1.3% to $111.2 billion, reflecting sharply lower natural gas prices.

The Hague-based group is the second of the integrated supermajors to come out with second quarter results. On Tuesday, Shell’s continental rival BP plc (BP) missed earnings forecasts despite reporting a jump in profits and warned investors about potential adverse effects from the Russian turmoil. U.S. biggies Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are scheduled to report later this week.

Segmental Performance

Upstream: Upstream segment earnings during the quarter (excluding items) were $4.7 billion, a considerable rise from the $3.5 billion (adjusted) earned in the year-ago period.

This primarily reflects the impact of strengthening liquids prices and production, together with positive effects from a firm Australian dollar on a deferred tax liability. To some extent, these factors were negated by the phasing of a dividend from an LNG unit, plus higher exploration expenses and depreciation.

Shell’s upstream volumes averaged 3,077 thousand oil-equivalent barrels per day (MBOE/d), essentially flat from the year-ago period. Natural gas volumes was up slightly, which was offset by a fall in crude oil output. Liquids contributed approximately 49% of Shell’s 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 – particularly Majnoon in Iraq and Mars B in the Gulf of Mexico – that boosted output by roughly 140 MBOE/d. However, this was offset by the effect of field declines.

Shell’s worldwide realized liquids prices were 3% above their year-earlier levels but natural gas realizations fell 8% from the second quarter of 2013. However, natural gas prices in North America jumped 16% from the last year’s level.

LNG equity sales volumes of 6 million tons were up 28% from the year-ago quarter, as contribution from the acquisition of Spain-based Repsol S.A.’s LNG properties and better operating performance in Nigeria.

Downstream: In the Downstream segment, the Anglo-Dutch super-major recorded a profit (excluding items) of $1.3 billion as against $1.2 billion in the year-ago period. The positive comparison reflects the impacts of strength in manufacturing and chemical operations, somewhat offset by higher costs, together with weak marketing and trading contributions.  

Cash Flow

During the quarter under review, Shell generated cash flow from operations of $8.6 billion, returned $3.3 billion to shareholders through dividends/share buybacks and spent $8.5 billion on capital projects.

Balance Sheet

As of Jun 30, 2014, Shell had $15.4 billion in cash and $44.1 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 13.4%.

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.

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