Shell Reports Profit, But Outlook is Not So Pretty (RDS-A, RDS-B, XOM, CVX, PTR)

Royal Dutch Shell PLC (NYSE: RDS-A; RDS-B) reported quarterly earnings early this morning and like counterparts Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) piles of profit are due almost solely to high crude oil prices. Refining margins have evaporated and natural gas prices in the US have fallen to a level that is close to unprofitable.

One of Shell’s big ideas is to shed assets. PetroChina Co. Ltd. (NYSE: PTR) announced this morning that it has acquired a 20% stake in the shale gas assets of Shell’s Canadian subsidiary for a price believed to be north of $1 billion. While shale gas is driving down the cost of natural gas in the US, in Canada a large portion of gas production is used to feed the energy-hungry oil sands industry, keeping prices somewhat higher.

Another big idea is to invest more in its upstream operations with the goal of reaching production of 4 million barrels/day by 2017. Shell also said that it would focus more on its North American projects that include oil as well as natural gas. Neither of these is a new idea. The company also said it would look at ways to export liquefied natural gas (LNG) to Asia. Another old idea, with a long lead time.

The company’s profits from its production rose 29% year-over-year for the quarter, but refining and downstream had a swing of about $650 million, from a $411 million profit last year to a loss of $244 million this year. The company’s production profits came exclusively from higher prices, as its actual produced barrels fell by about 180,000 barrels/day to 3.31 million barrels.

Shell tried to paper over some of this nasty news with a 2% hike in its dividend. That sometimes works, but this time analysts were expecting a rise of 4%.

Shares are down about -1.9% in pre-market trading this morning at $72.23 for RDS-A and $73.74 for RDS-B.

Paul Ausick