Royal Dutch Shell - Transitioning to life under a new Voss

It wasn’t long ago that the oil majors were public enemy number one posting bumper profits whilst consumers were forced to pay record prices at the petrol pumps.  Not so anymore.  Lower oil and gas prices have meant the ‘big oils’ across the board posted profit falls with some faring better than others.  Whereas BP and Conoco Phillips came in significantly ahead of expectations, results at Royal Dutch Shell were not so robust. 

A US$3 billion quarterly profit on the face of it is far from apocalyptic, however for Shell this was 73% lower than 2008 and the drop was more severe than that of its main rival BP. 

Comparisons with BP are par for the course for Shell whilst earnings at the former have been underpinned by a production growth, there was no such increase at Shell.  Uninspirational at first glance… but given that Shell’s reserve replacement levels have been steadily falling for many years, the result is no disappointment.

Shell’s target is to add 1 million barrels of oil equivalent per day to capacity by 2012 and if project pipeline is anything to go by Shell is well on track to achieving its goals.

Shell is investing more than its peers in order to bolster its portfolio and is on track to spend about $32bn on capital investments this year, $12 billion more than BP will spend.  This has enabled the expansion of an oil-sands venture in Canada, funded deepwater projects in the Gulf of Mexico and Brazil and funded the Pearl gas-to-liquids project in Qatar.

In addition Shell has taken the plunge and has officially committed to invest in the Chevron led Gorgon LNG project in Australia. With the IEA forecasting world demand for gas to rise 50% by 2030, Gorgon’s 60 year life will prove highly earnings accretive.

With Shell’s downstream profits (which include petrol retailing) also suffering as a result of slim margins and weak demand from consumers and industry for oil products and chemicals, there has never been a more important time to cut costs… and here Shell did not disappoint. 

The company has reduced operating costs by about US$1 billion so far this year with many of its initiatives yet to kick in.  CEO Voser’s Transition 2009 programme is cutting 5, 000 jobs, equivalent to about 5 percent of its workforce, the cost saving effects of which will be seen next year.

Turning to Shell’s balance sheet, there are not many that are stronger.  In its attempts to close the production gap on BP has seen it spend all of its cash flow on capital expenditure, leaving it forced to borrow to fund its dividend payment. With net debt only 14 per cent of equity from our perspective this is a non issue and Shell has plenty of more headroom should the need arise.

In summary, cost reduction programs are in place and low returning assets will be sold. Whereas BP is couple of years into their programme Shell has just started… meaning there is plenty of fat to strip out. The company has its focus on uplifts in exploration and development work to add shareholder value and with many projects on the go the long-term outlook is very favourable.