Cash flow from operations was $906 million for the quarter and $2,155 million for the first nine months of 2006, up $220 million and $29 million respectively from the same periods in 2005.
Capital and predevelopment expenditures amounted to $592 million in the third quarter and $1,488 million for the first nine months of 2006, excluding the BlackRock acquisition, compared with $410 million and $1,006 million respectively for 2005.
"Strong earnings reflect our drive for operational performance in an environment of falling commodity prices," said Clive Mather, President and Chief Executive Officer, Shell Canada Limited. "Production at the Athabasca Oil Sands Project is back above design rates following its first major turnaround in the second quarter. While we focus on operational excellence at our existing operations, we continue to lay the foundation for growth in our Oil Sands and unconventional gas businesses. In addition, the Company launched a new venture in the road transport sector, which further strengthens our Oil Products business."
Earnings ($ millions) Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 417 526 457 614 447 475 581 Cash Flow ($ millions) Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 637 803 686 930 722 527 906 Capital Expenditures(x) ($ millions) Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 269 327 410 709 404 492 592 (x) Excludes BlackRock purchase price
Shell Canada Limited earnings for the third quarter of 2006 were $581 million, up from $457 million for the corresponding quarter of 2005. Higher crude oil prices and refining light oil margins were offset by lower natural gas prices. The impact of the Company's Long Term Incentive Plan (LTIP) resulted in a $102 million increase to third-quarter 2006 earnings compared with an $83 million charge for the corresponding quarter in 2005. Prior year results included benefits totaling $41 million related to tax adjustments. Total hydrocarbon production for the quarter was 234,000 barrels of oil equivalent per day (BOE/d), level with production for the same quarter in 2005.
Earnings for the first nine months of 2006 were $1,503 million compared with $1,400 million for the corresponding period in 2005. The increase was mainly due to higher crude oil prices, refining light oil margins, a favorable adjustment resulting from changes to federal and Alberta corporate tax rates, and the LTIP. These were offset by reduced production and upgrading associated with the Athabasca Oil Sands Project (AOSP) turnaround.
Exploration & Production
Exploration & Production (E&P) earnings in the third quarter of 2006 were $113 million compared with earnings of $149 million reported for the same period in 2005. Earnings were down due to lower natural gas prices, partially offset by an LTIP uplift of $26 million and lower dry hole expenses. Previous year earnings included a $17 million favorable tax adjustment and a $12 million insurance settlement, offset by a charge of $24 million for the LTIP. Natural gas production grew as a result of increases in production from Tay River and basin-centred gas (BCG). Effective January 1, 2006, the Peace River business was transferred from E&P to the Oil Sands business unit. Prior period E&P earnings have been adjusted to exclude Peace River operations.
E&P earnings for the first nine months of 2006 increased to $443 million from $404 million for the same period in 2005. This increase was due to higher natural gas volumes, the impact of the LTIP, and a favourable adjustment resulting from changes to the federal and Alberta corporate tax rates.
The BCG program continues to grow, achieving natural gas sales volumes of 23 million cubic feet per day (mmcf/d) for the quarter. Significant discovered volumes remain constrained by the lack of infrastructure. BCG is expected to deliver 100 mmcf/d by the end of 2007, with the previously announced gas plant expansion and requisite regulatory approvals. Drilling operations continue on the large land holdings, with six rigs currently deployed.
In northeast British Columbia, the Foothills business successfully completed two new wells, which will be tied into new facilities under construction at Wolverine River. However, limitations in the main gathering system and processing facility will restrict gas sales from this region in the near term.
Progress continued on the Sable Offshore Energy Project compression project, and planned outages were taken in the third quarter to facilitate tie-in of the new compression facilities. Startup of these facilities is expected late in the fourth quarter.
Offshore Newfoundland, the first deepwater exploration well in the Orphan Basin was spudded in the third quarter and completion is expected in the fourth quarter. Shell Canada has a 20 per cent interest in eight exploration licenses in the Orphan Basin.
Oil Sands earnings in the third quarter of 2006 were $262 million, up from $235 million for the corresponding period of 2005. The improvement was mainly due to higher prices and an LTIP uplift of $22 million. Third-quarter earnings in 2005 included a charge of $14 million for the LTIP. The Company's share of AOSP bitumen production for the third quarter averaged 98,700 barrels per day (bbls/d) compared with 99,100 bbls/d for the same period in 2005.
Oil Sands earnings for the first nine months of 2006 were $493 million, compared with $592 million for the same period in 2005. The reduction in earnings is mainly due to the major scheduled turnaround of both the AOSP mine and upgrader in the second quarter. Effective January 1, 2006, earnings from the Peace River in situ operations are included in both current and prior period earnings.
Unit cash operating costs for the AOSP in the third quarter were $18.93 per barrel. This was $5.32 per barrel lower than the corresponding period last year. The improvement was mainly due to lower natural gas prices and a recovery related to LTIP. The Company realized an average synthetic crude price for the quarter of $68.37.
The Company will make a final investment decision for the AOSP Expansion 1 in the fourth quarter of 2006. Expansion 1 is a fully integrated expansion of the existing AOSP facilities, with both new oil sands mining operations on Lease 13 and associated additional bitumen upgrading at Scotford. As previously disclosed, Shell Canada received conditional approval from the Alberta Energy and Utilities Board for the proposed expansion of the Scotford Upgrader. A regulatory hearing was also completed in September for the expansion of the Muskeg River Mine and a decision is anticipated in the fourth quarter of 2006. On July 28, 2006, Shell Canada issued the formal expansion notice to the other AOSP joint venture owners, to which they have 90 days to respond.
In the third quarter, the Company decided to defer the upstream portion of the Production Optimization Project (POP), in light of the planned AOSP Expansion 1. A write-down of $15 million is included in earnings for the quarter. The timing and scope of the downstream components of POP, which are a mix of asset integrity and reliability projects at the upgrader, are currently being evaluated.
The Company decided to exercise its right to acquire a 20 per cent working interest in Chevron Canada's Ells River in situ leases, which are located about 50 kilometers northwest of Fort McMurray. This right to participate in the Ells River in situ leases results from the AOSP agreements.
In situ production for the third quarter was 15,300 bbls/d, of which approximately 6,600 bbls/d was due to new volumes from the assets acquired with the purchase of BlackRock Ventures Inc. (BlackRock). New thermal production from two additional well pads at Peace River came on stream in the third quarter of 2006 under budget and ahead of schedule.
The Company plans to file an application for its Carmon Creek project at Peace River later this year. In addition, construction work is progressing on the 10,000 bbls/d first phase of the Orion steam-assisted gravity drainage (SAGD) project at Hilda Lake, acquired in the BlackRock transaction. Building on the BlackRock experience, plans to further increase in situ cold production in the Peace River area are progressing, with the construction of two new cold production well pads and the filing of a regulatory application for a 100- well, cold production program. The Company has decided to divest the assets and properties in the Lloydminster area that were acquired with BlackRock.
Oil Products earnings in the third quarter of 2006 were $201 million, up from $81 million for the third quarter of 2005 due to improved refining margins and better refinery utilization, lower operating expenses and an LTIP uplift of $27 million. Stronger distillate, benzene and black oil margins were offset by weaker liquid petroleum gas margins. Refinery yield was lower in the third quarter of 2006 mainly due to some feedstock limitations at both the Scotford and Montreal East refineries as well as unplanned maintenance at the Sarnia Refinery. Refinery utilization improved as the third quarter 2005 was marked by a planned turnaround at the Scotford Refinery. Third-quarter 2005 earnings were also affected by high spot price purchases of gasoline to meet supply disruptions caused by Hurricanes Katrina and Rita, a charge of $25 million for the LTIP, and a favorable prior year tax adjustment of $25 million.
Oil Products earnings for the first nine months of 2006 were a record $560 million compared with $332 million in 2005. Improved refining light oil margins and an LTIP uplift offset reduced refinery yield.
The previously announced joint venture between Shell Canada's national cardlock network and Flying J's Canadian travel plazas is expected to contribute to increased network efficiency beginning in the fourth quarter. The company is now formed and working on an ambitious site development program, which will feature Shell fuels.
A major turnaround is scheduled to take place at the Sarnia Refinery between mid-October and mid-November.
Corporate earnings for the third quarter of 2006 were $5 million compared with negative $8 million for the corresponding period in 2005. The change was due to an LTIP uplift of $27 million offset by higher debt charges, while the corresponding quarter in 2005 had an LTIP charge of $20 million. Corporate earnings for the first nine months of 2006 were $7 million compared with $72 million for the corresponding period in 2005. The change was mainly due to a favourable adjustment in 2005 related to the use of non-capital losses available to the Company resulting from the acquisition of an affiliated company, Coral Resources Canada ULC.
Cash Flow and Financing
In the third quarter, cash flow from operations increased by $220 million to $906 million from $686 million for the same period last year. The increase is largely attributable to higher earnings and an increase in non-cash items. Cash flow from operations for the first nine months of 2006 was $2,155 million, an increase of $29 million from the same period in 2005.
Capital and predevelopment expenditures amounted to $592 million in the third quarter and $1,488 million for the first nine months of 2006, excluding the acquisition of BlackRock, compared with $410 million and $1,006 million respectively for 2005. The increase reflects an increased level of investment in growth projects including predevelopment work at the AOSP. Total capital and predevelopment expenditures for the year, excluding the BlackRock purchase price of $2.4 billion net of cash acquired, are expected to be in line with the announced investment plan of $2.7 billion for 2006.
Total debt outstanding at the end of the third quarter of 2006 was $1,459 million, which includes $954 million of commercial paper issued under the Company's $1.5 billion program, borrowings of $299 million against a $1 billion syndicated facility established in the second quarter of this year and $206 million for the mobile equipment lease. This compares with debt on the balance sheet of $211 million, mainly comprised of the mobile equipment lease, as at December 31, 2005.
Dividends paid in the third quarter of 2006 were $0.11 per common share totaling $90 million. This same level of dividend was paid in the first and second quarters of 2006 and reflects a 22 per cent increase in the dividend paid in the third quarter of 2005.
At October 15, 2006, the Company had 825,541,514 common shares outstanding (July 15, 2006 - 825,464,564 common shares and 100 preference shares) and there were 22,333,630 employee stock options outstanding, of which 11,256,400 were exercisable or could be surrendered to exercise an attached share appreciation right (July 15, 2006 - 22,557,058 outstanding and 11,474,136 exercisable). Effective September 30, 2006, the previously outstanding 100 preference shares were redeemed by the Company for cash consideration in accordance with their terms.
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