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Shell Q3 Earnings Undershot, Revs Up

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Europe’s largest oil company Royal Dutch Shell plc (RDS.A - Free Report) reported weak third quarter 2013 earnings due to high costs, lower output, supply disruptions in Nigeria and a drop in refining margin.

Hague-based Shell reported earnings per ADR (on a current cost of supplies basis) – excluding one-time items and gains or losses from inventories – of $1.43. This was well below the Zacks Consensus Estimate of $1.70 and the year-ago adjusted earnings per ADR of $2.10.

However, Shell’s revenues were up 3.9% year over year to $116.5 billion amid elevated natural gas prices in North America.

Earlier this week, Shell’s continental rival BP plc (BP - Free Report) beat earnings forecasts, apart from announcing a share repurchase program and a payout hike.

Segmental Performance

Upstream: Upstream segment earnings during the quarter (excluding items) were $3.5 billion, down 29.4% from $4.9 billion (adjusted) earned in the year-ago period.

This primarily reflects the impact of lower liquids realizations, a fall in gas prices ex-North America, higher depreciation and exploration expenses, increased operating costs, together with output disruptions in Nigeria. These factors were partly offset by output boost from the liquids rich-North American shale assets, ramp-up of the Pearl gas-to-liquids (GTL) development in Qatar, and higher domestic natural gas realizations.

Shell’s upstream volumes averaged 2.9 million oil-equivalent barrels per day (MMBOE/d), down 1.7% from the year-ago period. Natural gas volumes rose 4.5%, while crude oil output was down 7.1% from the corresponding period last year. Crude oil contributed approximately 51% of Shell’s total volumes, while natural gas accounted for the rest.

Production during the quarter compared with the year-ago quarter included volumes from new field start-ups and the continued ramp-up of existing fields, which boosted output by roughly 180 MBOE/d.

Shell’s worldwide realized liquids and natural gas prices were both 2% below their respective year-earlier levels. However, natural gas prices in North America increased 22% from the last year’s level.

LNG equity sales volumes of 4.88 million tons were down 2% from the year-ago quarter, as lower output from Nigeria LNG was only partially offset by better contribution from the various other LNG facilities .

Downstream: In the Downstream segment, the Anglo-Dutch super-major recorded a profit (excluding items) of $892.0 million as against $1.7 billion in the year-ago period. The negative comparison reflects the impacts of lower refining profitability, together with weak marketing and trading contributions.

To some extent, these factors were offset by improving oil product sales volumes and stronger Chemical earnings.

Cash Flow

During the quarter under review, Shell generated cash flow from operations of $10.4 billion, returned $4.3 billion to shareholders through dividends/share buybacks and spent $9.7 billion on capital projects.

Balance Sheet

As of Sep 30, 2013, Shell had $14.3 billion in cash and $37.1 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 11.2%.

Zacks Rank & Stock Picks

Royal Dutch Shell currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months

Meanwhile, one can look at Matador Resources Co. (MTDR - Free Report) and Northern Oil & Gas Inc. (NOG - Free Report) as good buying opportunities. These domestic upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

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