Shell used to be the drama queen among the oil majors. Remember the 2004
reserves scandal? Then BP picked up the mantle. Now, Europe’s biggest oil
and gas group by market value has become exceptionally and predictably
profitable.
Shell’s third-quarter results on Thursday continued this pattern: earnings
per share roughly doubling from a year earlier. Its share price is trading
at just under its all-time high of May 2011. Given the stability of its
earnings and the fact that huge capital investments are paying off nicely,
that looks justified.
Pay-off
The biggest pay-off for Shell is in Qatar, where its gas-to-liquids facility
should reach full production during 2012. But its North American gas
exposure is also crucial to its future plans: by next year, over 50 per cent
of Shell’s daily production – targeted at 3.5m barrels of oil equivalent –
will be from gas.
That makes the company the biggest play on the gas market among the
supermajors, with ExxonMobil (which also released colossal results on
Thursday) its closest rival. Shell predicts that gas demand will continue to
grow strongly – which it will have to if the huge investments made in the
gas business are really to pay off.
The question for chief executive Peter Voser is what to do with all the cash
it is now generating. Shell had $42bn of operating cash flow in the past 12
months, $12bn of it in the third quarter.
Long-term investment
About 75 per cent is reinvested in the business - there are 20 new upstream
projects planned up to 2014 - and a higher dividend pay-out may come from
next year. It has shrunk its gearing to 11 per cent, from 19 per cent a year
ago, and has sold $6bn of non-core assets this year.
Shell’s quarterly results show the value of long-term investment. Maintaining
the earnings momentum is the challenge. That will require either another
investment splurge, or an acquisition, to keep it going.
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