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Gas Prices, Refining Lift Shell Earnings

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Europe’s largest oil company Royal Dutch Shell plc (RDS.A - Free Report) reported strong first quarter 2013 earnings, helped by higher natural gas prices and stronger refining margins.

The Hague-based Shell, which follows continental rival BP plc (BP - Free Report) in coming out with better-than-expected profits, reported earnings per ADR (on a current cost of supplies basis) – excluding one-time items and gains or losses from inventories – of $2.38. This was above the Zacks Consensus Estimate of $2.07 and the year-ago adjusted earnings per ADR of $2.34.

However, Shell’s revenues were down 5.9% to $112.8 billion amid depressed oil prices.

Segmental Performance

Upstream: Upstream segment earnings during the quarter (excluding items) were $5.6 billion, down 9.9% from $6.3 billion (adjusted) earned in the year-ago period.

This primarily reflects the impact of lower liquids realizations, higher depreciation and exploration expenses, increased operating costs, together with less profit from liquefied natural gas (LNG) projects. These factors were partly offset by higher sales price of gas, ramp-up of the Pearl gas-to-liquids (GTL) development in Qatar, an increase in trading contributions, and tax credits.

Shell’s upstream volumes averaged 3.6 million oil-equivalent barrels per day (MMBOE/d), essentially unchanged from the year-ago period. Natural gas volumes rose 2.7%, while crude oil output was down 2.5% from the corresponding period last year. Crude oil contributed approximately 46% 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 175 MBOE/d.

Shell’s worldwide realized liquids prices were 7% below the year-earlier level, while natural gas realizations increased by 8%. In particular, natural gas prices in North America jumped 19% from the last year’s level.

LNG equity sales volumes of 5.15 million tons were flat with the year-ago quarter, as contribution from the Pluto LNG development in Australia were offset by lower output from Nigeria LNG.

Downstream: In the Downstream segment, the Anglo-Dutch super-major recorded a profit (excluding items) of $1.8 billion as against $1.2 billion in the year-ago period. The positive comparison reflects the impacts of higher refining profitability, Shell’s improved operating efficiency, solid marketing and trading contributions, together with higher Chemical earnings.

To some extent, these factors were offset by unfavorable foreign currency movements, increased depreciation, and a rise in taxes.

Cash Flow

During the quarter under review, Shell generated cash flow from operations of $11.6 billion, returned $3.2 billion to shareholders through dividends/share buybacks and spent $8.8 billion on capital projects.

Balance Sheet

As of Mar 31, 2013, Shell had $17.6 billion in cash and $35.8 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 9.1%.

Zacks Rank

Royal Dutch Shell currently carries a Zacks Rank #5 (Strong Sell), implying that it is expected to significantly underperform the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at other international integrated energy firms like Sasol Ltd. (SSL - Free Report) and Braskem S.A. (BAK - Free Report) as attractive investments. Both these firms – sporting a Zacks Rank #2 (Buy) – offer value and are worth accumulating at current levels.

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