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Market: LSE
Sector: Energy
EPIC: RDSB
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Royal Dutch Shell reports a strong rise in earnings for 2011’s second quarter

11th Aug 2011, 8:40 am

Royal Dutch Shell (LON:RDSB) has just reported a strong rise in earnings for 2011’s second quarter. Earnings rose by 56% compared to the 2010 number, to US$6.55 billion. The improvement in income was primarily driven by higher oil and gas prices on a year ago and improved operating efficiencies. 

The upstream business segment, Shell’s producing assets, contributed US$5.4 billion to earnings – 66% more than 2010.  Meanwhile the downstream business segment contributed US$1.08 billion - marginally lower, falling 6.8% on 2010.

 

The strong performance of the upstream business segment was due to higher prices for its products mix. Oil and gas equivalent production was lower in by 2% when compared to the previous corresponding figure however the decline is attributed to the divestment of producing assets in the quarter. 

 

Indeed, excluding the impact of divestments, production improved by 2%.  The company indicated that new field start-ups and the continuing ramp-up of existing fields contributed 285,000 barrels of oil equivalent to production. The positive contribution of new production more than offset the natural field decline for the quarter.

 

A critical factor for Shell is its ability to replace the natural decline that occurs in oil production. Although, the half year production numbers are a little soft, the production improvement shown in Q2 indicates the company’s growth strategy is paying dividends. 

 

The downstream business segment (Shell’s refining and retail) found the going a little tougher during the quarters with sales of both oil and chemical products falling during the quarter. Oil products fell by 8% and chemicals fell by 13%, once again exacerbated by divestments.  

 

Both upstream and downstream business segments were impacted by refining availability.  In turn, the operational availability of refineries was negatively impacted by maintenance activities and the divestment of refining assets. 

 

Refining availability is expected to recover in the current quarter. Sales volumes for both business segments are expected to remain soft over the remainder of the year however robust pricing is likely to continue to offset the impact of soft volumes. 

 

Turning to the financials, operating cashflow for the quarter rose by 24% year on year, to US$10 billion. Better prices for Shell’s oil and gas products were the primary drivers behind the improvement. 

Shell’s balance sheet, despite a heavy capital expenditure programme, is in good shape with the company’s gearing ratio improving to 12.1% at the end of the June. Not only has the recent trend in the gearing ratio been positive, but the company continues to remain well within its debt ratio range. 

 

The continued divestment of assets and ongoing robust market conditions will further strengthen Shell’s balance sheet providing a solid platform upon which the group can generate future growth.

 

 

This report was produced by Senior Research Analyst, Aamer Nawid. 

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