Cash flow from operations reached $686 million for the quarter and a record $2,126 million for the first nine months of 2005, up $37 million and $434 million respectively from the same periods in 2004.
Capital, including capitalized exploration and pre-development expenditure, was $410 million for the third quarter and $1,006 million for the first nine months of 2005 compared with $294 million and $626 million for the same periods in 2004.
"Both the Exploration & Production (E&P) and Oil Sands businesses delivered higher operational earnings in the third quarter," said Clive Mather, President and Chief Executive Officer, Shell Canada Limited. "In E&P, results from the basin centered gas drilling program have been encouraging and we will continue to invest in this significant growth area. Oil Sands achieved its second straight quarter of production above the design rate and added to its land base in the Athabasca region. And, in spite of maintenance activities at two of its refineries, Oil Products performed well in what has been a challenging environment."
Earnings ($ millions) Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 451 182 417 526 427 Cash Flow ($ millions) Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 649 588 637 803 686 Capital Expenditures ($ millions) Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 294 325 269 327 410 SHELL CANADA LIMITED MANAGEMENT'S DISCUSSION AND ANALYSIS Total Company Earnings Shell Canada Limited earnings for the third quarter of 2005 were $457 million, up $6 million from $451 million for the same period in 2004. Continuing strong commodity prices and refining margins contributed to the results. The impact of the Company's Long Term Incentive Plan (LTIP) resulted in an $83 million charge to earnings due to strong appreciation in the share price during the quarter. Third-quarter results included favourable after-tax benefits related to prior year tax adjustments of $41 million in 2005 and $55 million in 2004. Earnings for the first nine months of 2005 were $1,400 million compared with $1,104 million for the corresponding period in 2004 as stronger commodity prices and refining margins compensated for higher costs. After-tax LTIP charges of $146 million for the first nine months of 2005 were more than offset by the use of non-capital losses available to the Company in 2005 and by additional proceeds from insurance settlements to those in 2004. Exploration & Production Exploration & Production earnings in the third quarter of 2005 were $157 million compared with earnings of $129 million reported for the same period in 2004. The gains from strong commodity prices were partially offset by lower volumes. Expenses in the quarter included an after-tax charge of $24 million related to the LTIP. Exploration expenses were in line with expenditures incurred in the same quarter of 2004, while pre-development costs increased by $7 million after-tax. In the quarter, a favourable tax adjustment of $17 million and a favourable insurance settlement of $12 million after-tax were recorded. Exploration & Production earnings for the first nine months of 2005 were $402 million compared with $376 million for the same period in 2004, due to strong commodity prices offset by lower volumes and increased costs. Results in 2005 reflect favourable tax adjustments of $39 million and an insurance settlement of $12 million, offset by an after-tax charge of $42 million related to the LTIP. The Sable Offshore Energy Project natural gas volumes were higher in the third quarter of 2005 compared with the third quarter of 2004 and the second quarter of 2005 due to increased production from the South Venture field. Natural gas production volumes in Western Canada were lower in the third quarter of 2005 than in the same period of 2004 due to normal field decline and operational issues. The Tay River well, which started production in the second quarter of 2005, was re-tubed during September and came back on stream October 18, 2005. The increased tubing size is expected to increase well production to more than 50 million cubic feet per day from 30 million cubic feet per day. While the Company expects Western Canada production to increase in the fourth quarter, a scheduled outage at the Jumping Pound facility will partly offset the improvement. This will include the installation of an additional unit to increase sulphur recovery rates. Peace River volumes for the third quarter of 2005 increased from the prior quarter and were in line with production levels for the same period of 2004. Drilling of two additional well pads began in the third quarter and the resulting new production is expected to come on stream in late 2006. The proponents of the Mackenzie Gas Project (MGP) have been working diligently to resolve certain areas critical to the project in advance of the public hearings phase of the proposed project. Progress has been made in all key areas, with some having been largely resolved. However benefits and access agreements have not been concluded and the fiscal framework for the project has not been agreed with governments. The regulators will be advised in November 2005 of the MGP's decision on whether or not to proceed with a public hearing. Exploration drilling has yielded encouraging results for the Company's basin centered gas (BCG) program and a multi-rig program is planned for the upcoming winter drilling season. Pending access to third-party processing facilities, initial production from existing wells is expected in the fourth quarter of 2005. Infrastructure options are being evaluated for additional BCG production over the longer-term, including a possible new gas plant. The Company is currently working through the public and industry consultation process. Oil Sands Oil Sands achieved earnings of $227 million in the third quarter of 2005 compared with $173 million for the corresponding period in 2004. The increase was mainly due to higher prices and volumes, offset in part by increased unit costs. Earnings in the third quarter of 2005 include an after-tax charge of $14 million related to the Company's LTIP. Third-quarter 2004 earnings included a $21 million contribution from a prior year tax adjustment. After adjusting for an $82 million insurance settlement in the second quarter, earnings in the third quarter of 2005 were up 25 per cent from the prior quarter. This was the result of higher prices and volumes offsetting increased costs. Oil Sands earnings for the first nine months of 2005 were $594 million, up significantly from $365 million for the same period in 2004 as higher prices and volumes more than offset increased costs. Higher proceeds from insurance settlements in 2005 also contributed to the earnings increase. In the third quarter of 2005, underlying commodity prices and the average synthetic crude oil price were significantly stronger than in the prior quarter and the same period last year. Heavy oil market differentials narrowed somewhat during the third quarter but remained much wider than those experienced in the third quarter of 2004. The average synthetic crude oil price differential relative to Edmonton light crude improved by about $1.35 per barrel from the second quarter of 2005 but was almost $3.00 per barrel wider than in the third quarter of last year. The Company's share of bitumen production in the third quarter of 2005 averaged 99,100 barrels per day (bbls/d) compared with 92,500 bbls/d for the same period of 2004. Total bitumen production in the third quarter of 2005 averaged 165,100 bbls/d, a new quarterly production record even with the planned maintenance work undertaken and completed during September. Bitumen production was often well above the design rate during the quarter, at times prompting the blending and sale of additional heavy product at the upgrader. Total bitumen production for the first nine months of 2005 averaged 153,800 bbls/d, approaching the calendar day design rate of 155,000 bbls/d. Unit cash operating costs in the third quarter of 2005 were $24.25 per barrel. This was up $3.79 per barrel from the preceding quarter and up $5.47 per barrel versus the corresponding period last year due mainly to LTIP charges, planned maintenance costs and increased energy costs. Higher natural gas and LTIP costs accounted for more than 75 per cent of the year-over-year increase. Improvements in unit cash operating costs related to higher reliability and production are being offset by increased costs for energy, materials and services in the current high commodity price environment. With West Texas Intermediate crude oil prices in a range of $40 to $60 per barrel, unit cash operating costs (excluding LTIP and major maintenance costs) are targeted to range from $16 to $20 per barrel. During the third quarter, the Company's investment in Oil Sands continued with the acquisition of additional oil sands leases with mining potential in the Athabasca area. Four leases were acquired through Alberta Crown land sales with a combined area of 18,560 hectares for a total value of $72 million. This included Leases 351 and 352 acquired at the August 24th land sale and Leases 631 and 632 at the September 21st sale. Oil Products Oil Products earnings for the third quarter were $81 million compared with $114 million for the same period in 2004. This decrease was primarily related to maintenance activities at the Montreal East and Scotford refineries. An after-tax LTIP charge of $25 million in the third quarter was offset by a prior year tax adjustment of $25 million. Third-quarter 2004 earnings included a favourable prior year tax adjustment of $11 million and after-tax provision for the loyalty program of $23 million. A previously announced planned turnaround at the Scotford Refinery near Edmonton was completed at the end of September and the refinery resumed operations in the first week of October. At the Montreal East Refinery, unplanned maintenance work on a compressor in a hydro-cracker unit resulted in reduced throughputs and higher black oil yields. Work on this compressor is expected to be completed by late October. The quarter was marked by supply disruptions and unprecedented volatility in fuel prices in North America following hurricanes Katrina and Rita. Nevertheless the Company was able to ensure a reliable supply to customers at competitive prices. Market factors also compounded the impact of maintenance activities during the third quarter. While light oil refining margins remained strong, black oil and benzene margins were below those realized earlier in the year. It was also necessary to purchase additional supplies of gasoline at high spot prices to meet customer needs and marketing margins continued to be severely compressed for most of the third quarter. As a result, the Company was unable to take full advantage of the strong market for light oils. Operating expenses rose in the third quarter of 2005 compared with the same period in 2004. The increase was due to higher costs associated with the maintenance and turnaround activities at the refineries, increased costs associated with price sensitive items and LTIP charges. Oil Products earnings for the first nine months of 2005 were $332 million compared with $342 million for the same period in 2004. Improved refinery yield and margins, sales volumes and larger favourable tax adjustments were partially offset by higher costs. Operating expenses rose over the same period last year mainly due to the LTIP charges of $45 million, higher advertising expenses for the launch of Shell V-Power(TM) gasoline, and higher refinery turnaround and maintenance costs. The launch of Shell V-Power(TM) gasoline in June of 2005 continues to have a positive impact on the retail business with increased sales of premium gasoline in the third quarter of 2005 compared with the previous 12-month trend. (TM) Trademark of Shell Canada Limited. Used under licence by Shell Canada Products. Corporate Corporate earnings for the third quarter of 2005 were negative $8 million compared with earnings of $35 million for the corresponding period in 2004. Third-quarter earnings included a $20 million after-tax charge related to the LTIP. The corresponding quarter in 2004 included a $23 million benefit from a prior year tax adjustment. Corporate earnings for the first nine months of 2005 were $72 million compared with earnings of $21 million for the same period in 2004. In 2005, results were improved by $99 million after-tax due to the use of non-capital losses and negatively impacted by $35 million due to the after-tax LTIP charge. In 2004, the prior year tax assessments increased the nine-month corporate earnings. Cash Flow and Financing In the third quarter of 2005 and for the comparative periods, the Company has reflected certain exploration expenses as a reduction of cash flow from operations. These expenses were previously reflected as investing activities in the consolidated statement of cash flow. The impact for the nine-month period of 2005 is a reduction of cash flow from operations of $67 million (2004 - $54 million) and, in the third quarter of 2005, a reduction of cash flow from operations of $30 million (2004 - $18 million). Cash flow from operations was $686 million for the third quarter of 2005 and a record $2,126 million for the first nine months of 2005. This represents an increase of $37 million over the same quarter last year, and $434 million higher than for the corresponding nine-month period in 2004. This increase is largely attributable to higher commodity prices. During the third quarter, the remaining $150 million balance under the accounts receivable securitization program was reduced to zero and the Company elected to terminate the program. Significant cash generation also allowed for the reduction of $284 million in medium-term debt as well as accounts receivable securitization in the first nine months of 2005. Corporate debt at the end of the third quarter is now limited to the $217 million for the mobile equipment lease. Capital, exploration and pre-development expenditures for the third quarter were $410 million and $1,006 million for the first nine months of 2005. This compares with $294 million and $626 million for the same periods in 2004 respectively. The main drivers for this increase were expenditures on the ultra-low-sulphur diesel projects and higher exploration expenditures related to the BCG program. Total capital expenditures for the year are expected to be approximately ten per cent below the original capital expenditure plan of $1.8 billion for 2005. Plans to capitalize a lease arrangement for large mobile equipment at the Muskeg River mine were not implemented, accounting for the majority of this change. Dividends paid in the third quarter were $0.09 per common share totalling $74 million. This reflected an eight per cent increase over the dividend per share paid in the second quarter. In the first nine months of 2005, the Company paid $211 million in dividends on its common shares. The third-quarter-end cash balance of $484 million has been invested in short-term money market investments. Outstanding Shares At October 15, 2005, the Company had 825,074,112 common shares and 100 preference shares outstanding (July 15, 2005 - 824,992,312 common shares and 100 preference shares) and there were 21,544,416 employee stock options outstanding, of which 10,163,103 were exercisable or could be surrendered to exercise an attached share appreciation right (July 15, 2005 - 22,340,611 outstanding and 10,939,801 exercisable).
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