Shell 2Q Profit Up 34%, Nearly Doubles Earnings

Shell released its second quarter and half year 2010 results and second quarter interim dividend announcement for 2010.

Royal Dutch Shell Chief Executive Officer Peter Voser commented, "We are delivering on our strategy. Shell's cost programs have delivered over $3.5 billion of annualized underlying savings. Our investments have underpinned a 5% increase in oil and gas production for the quarter, a 34% increase in LNG sales volumes, and an 18% increase in chemicals sales volumes. This is a good performance from Shell, despite today's challenging macro economic conditions. We are on track for growth.

We are making good progress on delivering performance improvement, a new wave of production growth, and maturing the next generation of growth options for shareholders.

The corporate restructuring program we announced a year ago, called Transition 2009, is now complete. The three new businesses, created in Transition 2009 – Upstream Americas, Upstream International, and Projects & Technology – are a powerful platform for a faster implementation of strategy, clearer accountabilities, and a competitive focus. Transition 2009, restructuring in corporate functions, and our initiatives in Downstream have resulted in annualized underlying cost savings of over $3.5 billion, exceeding the target by around 15% and some 6 months ahead of schedule. Approximately 7,000 employees will leave Shell as a result of these changes, some 18 months earlier than planned.

We have exceeded the targets we set last year for costs and staff reduction. We are putting new emphasis on "continuous improvement," which will drive competitive financial and operating performance through the business cycle, and build on Shell’s high safety and environmental standards. Capital efficiency is an important part of our continuous improvement drive. We will exit from non-core positions, both in Upstream and Downstream as we refocus our portfolio on material positions with growth potential. We expect $7-8 billion of asset sales in 2010-11, as we accelerate our disposal plans.

Shell is in a delivery window for new growth. Gbaran-Ubie, on stream at the end of the second quarter, the 4th of 13 new project start-ups in the 2010-11 timeframe, which underpin Shell's cash flow and production growth targets for 2012."

Turning to longer term opportunities, Voser commented, "We continue to make good progress generating growth options. During the second quarter, we announced the acquisition of substantial new positions in US on-shore gas, with the purchase of East Resources, Inc., which is a leader in the Marcellus shale, and new acreage in the liquids-rich Eagle Ford shale gas play in South Texas.

"We continue to see mixed signals in the global economy. Oil prices have remained firm so far this year, but refining margins, oil products demand and natural gas spot prices all remain under pressure. Our earnings and cashflow have rallied from 2009's lows, but the outlook remains uncertain."

Commenting on the industry situation in the Gulf of Mexico, Voser said, "The BP Macondo blow-out and the related Gulf of Mexico oil spill is a tragedy for everyone affected. We were all shocked by the loss of life there, and the on-going and wide-spread impacts from the spill. World-wide deep water production has an important role to play in the global energy supply equation, with potential for production growth with supply diversity, and sustained investment in technology, jobs and services. The recent announcement of Shell's participation in a new, $1 billion Gulf of Mexico oil spill containment system, is an example of where we are working with governments and partners to improve the industry's capabilities."

Voser concluded, "I am pleased with the results in the second quarter 2010. We are putting the priority on a sharper delivery of our strategy, aiming for profitable growth and a more competitive performance from Shell."

SECOND QUARTER 2010

Upstream

In the USA, Shell has agreed to acquire all of the business of East Resources, Inc. for a cash consideration of $4.7 billion, with a primary focus on the Marcellus shale, in the northeast USA covering an area of some 2,600 square kilometers (650,000 net acres) of highly contiguous acreage and 4,250 square kilometers (1.05 million net acres) of acreage overall. In addition, as part of its on-going acreage build strategy, Shell has acquired some 1,000 square kilometers (250,000 net acres) of mineral rights in the Eagle Ford shale play, in South Texas. These new positions have the potential to yield over 16 trillion cubic feet of gas equivalent (tcfe).

In Nigeria, oil and gas production started from the Gbaran-Ubie project in the Niger Delta (Shell share 30%). When fully operational next year, it will be capable of producing 1 billion standard cubic feet of gas per day (scf/d) and some 70 thousand barrels of oil per day (b/d).

Also in Nigeria, the Shell Petroleum Development Company of Nigeria (SPDC, Shell share 30%) is working on a series of projects that will lead to more than three quarters of its production potential being covered by associated gas gathering (AGG) facilities. Work has now restarted at many projects previously delayed by funding or security problems. The projects, which will cost more than $2 billion (100%), cover 26 flow-stations in the Niger Delta. The gas will then be available for use in power stations and by industry.

In Qatar, Shell signed a new Exploration and Production Sharing Agreement (EPSA) for Qatar Block D. Under the agreement, the partners will jointly explore for natural gas in an area of 8,089 square kilometers onshore and offshore Qatar. The total term of this agreement is 30 years and starts with a five-year First Exploration Period.

In Syria, Shell has sold a 35% interest in Syria Shell Petroleum Development (SSPD), previously 100% owned, to China National Petroleum Corporation (CNPC). SSPD has interests in three production licenses covering some 40 oil fields, with production in 2009 of approximately 20 thousand barrels of oil equivalent per day (boe/d; Shell share).

During the second quarter 2010, Shell participated in 2 exploration discoveries, and one appraisal, all in Australia. We also saw particularly strong results from exploration and appraisal drilling in the North American Haynesville tight-gas area. Shell also increased its overall acreage position, completing acquisitions of new exploration licenses in Canada, China, Qatar, Russia, Tunisia and the USA, and successfully bidding for new licenses in Colombia and Italy.

Downstream

In Greece, Shell completed the sale of its downstream businesses, and an agreement for the continued use of the Shell brand in the Greek market, for a final sale price of around $0.3 billion. The sale included Shell's retail, commercial fuels, bitumen, chemicals, supply and distribution, and liquefied petroleum gas (LPG) businesses, as well as a lubricants oil blending plant.

Key features of the SECOND quarter 2010

  • Second quarter 2010 CCS earnings were $4,529 million, 94% higher than in the same quarter a year ago.
  • Second quarter 2010 CCS earnings, excluding identified items (see page 5), were $4,208 million compared to $3,150 million in the second quarter 2009.
  • Second quarter 2010 reported earnings were $4,393 million compared to $3,822 million in the same quarter a year ago.
  • Basic CCS earnings per share increased by 95% versus the same quarter a year ago.
  • Cash flow from operating activities for the second quarter 2010 was $8.1 billion, compared to $0.9 billion in the same quarter last year. Excluding net working capital movements, cash flow from operating activities in the second quarter 2010 was $8.6 billion, compared to $3.8 billion in the same quarter last year.
  • Total dividends paid to shareholders during the second quarter 2010 were $2.4 billion.
  • Capital investment for the second quarter 2010 was $6.8 billion. Net capital investment (capital investment, less divestment proceeds) for the second quarter 2010 was $5.6 billion.
  • Return on average capital employed (ROACE), on a reported income basis, was 9.1%.
  • Gearing was 16.9% at the end of the second quarter 2010 versus 12.6% at the end of the second quarter 2009.

Upstream

  • Oil and gas production for the second quarter 2010 was 3,110 thousand boe/d, 5% higher than in the second quarter 2009.

Production for the second quarter 2010 excluding the impact of divestments, production sharing contracts (PSC) pricing effects and OPEC quota restrictions was 6% higher compared to the same period last year.

Underlying production in the second quarter increased by some 160 thousand boe/d from new field start-ups and the continuing ramp-up of fields, more than offsetting the impact of field declines.

  • LNG sales volumes of 3.88 million tonnes in the second quarter 2010 were 34% higher than in the same quarter a year ago.

Downstream

  • Oil Products sales volumes were 7% higher than in the second quarter 2009. Chemical product sales volumes in the second quarter 2010 increased by 18% compared to the second quarter 2009.
  • Oil Products refinery availability was 94% compared to 95% in the second quarter 2009. Chemicals manufacturing plant availability was 95%, 7 percentage points higher than in the second quarter 2009.

Summary of identified items

Earnings in the second quarter 2010 reflected the following items, which in aggregate amounted to a net gain of $321 million (compared to a net charge of $810 million in the second quarter 2009), as summarized in the table below:

  • Upstream earnings included a net gain of $10 million, reflecting revisions to redundancy provisions and tax credits, which were partly offset by a net loss related to changes in the mark-to-market valuation and accounting of certain gas contracts, cost impacts from the US offshore drilling moratorium and an asset impairment. Earnings for the second quarter 2009 included a net charge of $115 million.
  • Downstream earnings included a net gain of $311 million, reflecting a gain from a divestment, a gain related to the estimated fair value accounting of commodity derivatives (see Note 5) and revisions to redundancy provisions, partly offset by an impairment charge. Earnings for the second quarter 2009 included a net charge of $678 million.
  • Corporate earnings and Non-controlling interest for the second quarter 2009 included a charge of $17 million.

Second quarter Upstream earnings were $3,270 million compared to $2,091 million a year ago. Earnings included a net gain of $10 million related to identified items, compared to a net charge of $115 million in the second quarter 2009.

Upstream earnings compared to the second quarter 2009 reflected the effect of higher realized crude oil and natural gas prices on revenues, higher LNG realizations, higher natural gas production volumes and increased LNG sales volumes, which were partially offset by increased production taxes and the impact of maintenance activities on oil production volumes. In addition, a generally weak environment for trading activities affected the second quarter 2010 earnings.

Global liquids realizations were 41% higher than in the second quarter 2009. Global gas realizations were 15% higher than in the same quarter a year ago. In the Americas, gas realizations increased by 22%. Outside the Americas, gas realizations increased by 13% whereas European gas realizations decreased by 9%.

Second quarter 2010 production was 3,110 thousand boe/d compared to 2,949 thousand boe/d a year ago. Crude oil production was in line and natural gas production was up 12% compared to the second quarter 2009. Second quarter 2010 oil production volumes compared to the same quarter in 2009 were some 100 thousand boe/d lower as a consequence of maintenance activities mainly at the Athabasca Oil Sands project in Canada, the Mars corridor in the USA Gulf of Mexico and the EA Field in Nigeria.

Underlying production, compared to the second quarter 2009, increased by some 160 thousand boe/d from new field start-ups and the continuing ramp-up of fields over the past 12 months, more than offsetting field declines.

LNG sales volumes of 3.88 million tonnes were 34% higher than in the same quarter a year ago. Volumes reflected the continued ramp-up in sales volumes from the Sakhalin II LNG project and improved volumes from Nigeria LNG.

Half year Upstream earnings were $7,685 million compared to $4,275 million in 2009. Earnings included a net gain of $120 million related to identified items, compared to a net gain of $215 million in the half year 2009.

Upstream earnings compared to the half year 2009 reflected the effect of significantly higher realized oil prices on revenues, increased LNG sales volumes and realizations, and higher natural gas production volumes. These were partially offset by the impact of lower natural gas prices on revenues, higher production taxes and reduced trading contributions compared to the half year 2009.

Global liquids realizations were 56% higher than in the half year 2009. Global gas realizations were 5% lower than in the half year 2009. In the Americas, gas realizations increased by 22% whereas outside the Americas, gas realizations decreased by 10%.

Half year 2010 production was 3,351 thousand boe/d compared to 3,166 thousand boe/d for the same period a year ago. Crude oil production was up 1% and natural gas production was up 12% compared to the half year 2009 production.

LNG sales volumes of 8.11 million tonnes were 36% higher than in the half year 2009. Volumes reflected the continued ramp-up in sales volumes from the Sakhalin II LNG project and improved volumes from Nigeria LNG.

Second quarter Downstream CCS earnings were $1,471 million compared to a loss of $275 million in the second quarter 2009. Earnings included a net gain of $311 million related to identified items, compared to a net charge of $678 million in the second quarter 2009.

Downstream CCS earnings compared to the second quarter 2009 reflected higher Oil Products marketing earnings, improved refining contributions and significantly improved Chemicals earnings.

Oil Products marketing CCS earnings compared to the same period a year ago reflected higher retail earnings and reduced B2B and lubricants contributions. In addition, a generally weak environment for trading activities affected the second quarter 2010 earnings.

Oil Products sales volumes increased by 7% compared to the same quarter last year.

Refining CCS results benefited from higher realized refining margins reflecting improved worldwide industry refining margins compared to the same period a year ago. Results also benefited from higher refinery plant intake volumes, which increased by 5%. Refinery availability was 94% compared to 95% in the second quarter 2009.

Chemicals CCS earnings improved from a loss in the second quarter 2009, reflecting higher realized chemicals margins and higher chemicals sales volumes, which were partly offset by reduced income from equity-accounted investments and higher operating costs.

Chemicals sales volumes increased by 18% compared to the same quarter last year. Chemicals manufacturing plant availability increased to 95%, some 7 percentage points higher than in the second quarter 2009.

Half year Downstream CCS earnings were $2,214 million compared to $728 million in the half year 2009. Half year reported earnings were $2,656 million compared to $2,463 million in the same period last year. Earnings included a net gain of $276 million related to identified items, compared to a net charge of $883 million in the half year 2009.

Downstream reported earnings, excluding the impact of rising oil prices on inventory costs, reflected higher Oil Products marketing earnings, improved refining contributions and significantly improved Chemicals earnings.

Oil Products marketing earnings compared to the half year 2009 increased mainly due to higher retail and lubricants earnings, which were partly offset by lower B2B earnings. In addition, a generally weak environment for trading activities affected the first half 2010 earnings.

Oil Products sales volumes increased by 5% compared to the same period last year.

Industry refining margins for the half year 2010 were lower globally compared to the same period 2009, except for the European region. However, refining earnings for the half year 2010 benefited from improved realized refining margins in all regions, except in the US West Coast. Compared to the same period in 2009, refinery plant intake volumes were in line and refinery availability was 92% compared to 93%.

Chemicals earnings, excluding the impact of rising oil prices on inventory, reflected higher realized chemicals margins, higher chemicals sales volumes, higher income from equity-accounted investments and lower operating costs compared to the half year 2009.

Chemicals sales volumes increased by 15% compared to the half year 2009. Chemicals manufacturing plant availability increased to 93%, some 3 percentage points higher than in the same period last year.

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