Shell: full year results

8:14 a.m. Thu 02 Feb 2006

High oil prices have seen Shell report a 30% increase in earnings (at current cost of supplies) for the year to December 2005. On an IFRS basis the company reported a 3% growth in pre-tax profits for Q4 (to $7,933m) and a 41% increase in pre-tax profits for the year (to $44,567m).

Production for the year 2005 was 3.5m boepd, at the low end of expectations partly due to storms, the end of a production sharing contract in the Middle East, lower entitlements due to higher hydrocarbon prices and the impact of divestments. Total losses from these factors are estimated to have been 220,000 boepd.

Profits in Q4 were adversely affected by the storm season with an estimated 129,000 boepd lost production. The company estimates the cost of storm damage at $250m-$300m (before insurance recoveries).

Profits in the upstream Exploration & Production business dropped by 18% (to $2,918m) in Q4 mainly as a result of lost production. Better prices pushed Gas & Power profits up 14% in Q4 (to $605m) but in the downstream Oil Products business profits dipped 19% to $1,898m in Q4 due to lower margins caused by high input (ie crude oil) costs.

For the year as a whole, firm oil prices propelled E&P profits by 45% to $14,238m and was the main driver of earnings of the group as a whole. With the medium term outlook on oil prices firm, earnings are dependent mainly on the ability of the company to maintain production.

The production outlook for 2006 is at the lower end of 3.5m to 3.8m boepd which means that growth is likely to be dependent mainly on oil prices, currently at record levels. In the medium term the reserve replacement ratio is a concern (this ratio is an indication of how fast the company is acquiring new energy reserves to replace what has been pumped out). While Shell has been targeting a replacement ratio of 100% for the past couple of years it only achieved 70%-80% which means production capacity could be impaired in the medium term.

Output in Q1 and H1 of next year could be boosted as storm-damaged facilities are gradually brought on line and may provide short-term upside for the stock, particularly if current oil prices hold for the next quarter.

In the longer term Shell may well lag some of its peers but the prospective PE (13.8x on 2006 earnings) is in line with the sector; whereas a small discount may be warranted. The yield is 3.4%.