Last updated: January 31, 2013 4:48 pm

US upstream arm weighs on Shell results

Royal Dutch Shell

Royal Dutch Shell, Europe’s largest oil company by production, unveiled disappointing fourth-quarter results dragged down by a loss in its US upstream division.

The result shows how the North American shale gas boom, which pushed US natural gas prices down to 10-year lows last spring, is continuing to weigh on oil companies’ earnings. Shell is the first supermajor to report, with ExxonMobil, Chevron, BP and Total unveiling their results in the next few days.

Shell’s profits stood at $5.58bn on an adjusted current cost of supplies basis, compared with $4.8bn a year ago – an increase of 15 per cent.

But they came in well below analysts’ expectations and Shell’s shares fell 1.7 per cent Thursday.

Shell insisted it was on track to meet its medium-term targets for production and cash flow. It aims to increase output to 4m barrels of oil equivalent in 2017-18, compared with 3.3m boe/d last year, and to add $15bn of cash flow in 2015.

But analysts were troubled by a disappointingly low reserves replacement ratio of 44 per cent, meaning Shell failed to fully replace the oil and gas it produced with new reserves. There was also concern at a big projected increase in net capital spending this year, to $33bn this year compared with $30bn in 2012.

That was offset by some positive news on the dividend, which will rise from $0.43 to $0.45 a share in the first quarter – an increase of 4.7 per cent and the largest rise in three years.

Shell said it had incurred a second consecutive quarterly loss in its US exploration and production division, blaming low realised prices for the oil and gas it pumps there.

It faces a similar problem in Canada, where a lack of export capacity has driven down the price of synthetic crude produced from Alberta’s oil sands. Shell said it was selling its Canadian bitumen for $50-$55 a barrel – half the price of Brent crude.

Another factor weighing on its US operations is higher costs: the company has been spending large sums on feasibility studies for projects designed to increase the value of its US gas reserves, such as gas-to-liquids and gas-to-chemicals plants, and plans to use liquefied natural gas in transport. It recently announced a joint venture with Kinder Morgan’s pipeline unit to build an LNG export terminal on the US east coast.

Also, like other operators in the US, Shell has been driven by low natural gas prices to switch from shale gas to “tight oil”, shifting production to places such as the Eagle Ford shale in south Texas. That has led to a short-term dip in output, which also weighed on profits.

Earnings would “remain under pressure for some time to come”, said Simon Henry, Shell’s chief financial officer.

Shell said low gas prices in the US were also partly to blame for its low reserves replacement ratio. The Securities and Exchange Commission requires companies to use average prices for the year in reserves calculations, and the price of Henry Hub gas in the US averaged only $2.80 per MBtu last year. That substantially reduced Shell’s reported reserves, said Peter Voser, Shell’s chief executive.

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