Royal Dutch Shell (LON:RDSA) managed to increase oil production in 2010 which in combination with stronger oil prices and cost cutting has led to profits almost doubling over 2009. Increasing production going forward is a key focus for the group as the business invests for growth. With a relatively low valuation and a positive outlook for energy prices we remain optimistic.
As far as the Western oil majors are concerned simply maintaining output is considered to be an achievement. Shell’s production boost of 5% to 3.31m barrels of oil equivalent (boe) was therefore a meaningful increase.
This was driven by natural gas which saw output rise by 10% in 2010 while crude oil output rose by 2%. New field start-ups and the ramp-up of existing fields more than offset field declines which are the bane of large oil firms.
Clearly, then, Shell is delivering the goods on the production side of the business. Going forward, the objective is to maintain the momentum with the target being for an 11% increase in oil and natural gas production from 2009 to 2012.
Capital investment to meet Shell’s growth objectives is expected to come in between $25-27 billion in 2011 which compares to $23.7bn in 2010. A sign of the strong investment programme is that gearing increased in 2010 to 17.1% from 15.5% at the end of 2009.
Shell has also been cutting costs with overheads reduced by $2bn in 2010 and the same amount in 2009. Thus in the last two years $4bn of costs have been taken out of the business which is a cost reduction of around 10%.
Turning to the financial performance and the figures for 2010 show how increasing production, reducing costs and higher oil prices can boost the bottom line. Profits for the year came to $18.6bn on a current cost of supplies basis (adjusting for the effect of price changes on inventories) compared to $9.8bn in 2009 – an increase of 90%.
The main driver for the profits rise was higher energy prices as oil has been on an upwards trend for the last two years. This is as emerging markets increase their demand and concerns on the security of Middle East supplies remain.
US natural gas prices, though, remained weak in 2010 as the shale gas boom served to increase output. Shell is investing heavily in this…
