More Gains for Royal Dutch Shell in 2Q

We like how Shell is increasing oil and gas production, while also moving ahead of schedule with downstream cost savings

Catharina Milostan 29 July, 2010 | 4:55PM
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Royal Dutch Shell has reported another quarter of year-over-year earnings gains, with adjusted second-quarter earnings of $4.2 billion, up 35% from $3.1 billion earned a year ago. We like how Shell is increasing oil and gas production from year-ago levels while it is moving ahead of schedule with downstream cost savings. This led to higher second-quarter earnings gains at both the upstream and downstream units, putting Shell on course with 2010 goals. Shell expects another $7 billion-$8 billion in asset sales this year and into 2011 as it continues to streamline its businesses. Of particular interest will be Shell's growing interest in acquiring US gas shale properties and plans to spearhead along with other oil majors new offshore US safety initiatives. We'll also look for progress on exploration efforts and more downstream asset sale and cost savings to drive long-term growth.

Higher oil prices plus a 5% production gain from field startups and expansions combined to drive up second-quarter upstream earnings to $3.2 billion from $2.1 billion earned a year ago. Shell's momentum in building upstream assets is encouraging, with the startup of the Gbaran-Ubie project in the Niger Delta during the second quarter and more Nigerian projects under way. Also intriguing are recent purchases to boost exposure to US gas shales via the planned purchase of East Resources and its Marcellus Shale holdings in Pennsylvania, and a purchase of 250,000 net acres in South Texas' Eagle Ford shale play. New exploration agreements and licences in Qatar, Canada, China, Russia, Tunisia, and the United States should help to build Shell's long-term upstream portfolio.

On the downstream side, Shell has impressed us by achieving more than $3.5 billion of annualised cost savings, which is six months ahead of schedule and exceeds targets set in 2009 by 15%. About 7,000 employees will leave Shell, which is 18 months earlier than planned. Higher refining margins along with 5% higher refinery plant intake volume and improved chemical earnings combined with the cost savings to drive up downstream earnings. Second-quarter downstream earnings grew to $1.5 billion in the second quarter from a loss of $275 million a year ago.

Catharina Milostan is an equities analyst with Morningstar.

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Catharina Milostan  Catharina Milostan is a stock analyst with Morningstar.

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