Rising oil and gas prices help profits flow at Shell

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ROYAL Dutch Shell, Europe’s largest oil company, reported a big jump in profits, driven by higher oil and gas prices.

Strong demand for gas after the Fukushima nuclear disaster helped Shell to double its profits in the three months between July and September.

The Japanese earthquake earlier this year and subsequent shutdown of nuclear plants has boosted demand for natural gas, especially liquefied natural gas, where Shell is a market leader.

Shell reported profits of £4.5bn in the third quarter of 2011, up from £2.2bn last year.

The much improved results will prove controversial as they come at a time when motorists are struggling to pay rocketing petrol prices.

Shell has benefited from a 48 per cent rise in oil prices, partly caused by unrest in the Middle East and North Africa, as well as a two per cent increase in production, excluding asset sales.

Natural gas prices have risen nearly a third after the Fukushima nuclear disaster boosted demand as Japan sought alternative sources of power.

The results, which were in line with City expectations, came two days after rival BP reported a three-fold increase in profits to £3.2bn for the three months to September.

Shell said its investments in big new projects in Canada and Qatar are paying off, while its results were also boosted by stronger refining margins.

It plans 20 new investments between 2011 and 2014.

Earnings at its downstream business, which includes petrol stations, increased by 24 per cent to £1.1bn. Shell’s chief executive Peter Voser said that although the company had already met its target of £3.1bn of disposals this year, including the £750m sale of Stanlow refinery in Cheshire, sales of ‘non-core’ assets will continue.

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said the results were a reminder of why some investors adhere to the adage “never sell Shell”.

“The update may be the cause of some admiring glances from arch rival BP, which is currently in the midst of its own transformation,” he said.

Shell’s production fell two per cent to 3.01 million barrels of oil equivalent. Once field sales were stripped out, output rose.

Analysts agreed that Shell is entering a ‘sweet spot’ of strong cash flow thanks to its Athabasca oil sands project in Canada and its Pearl gas-to-liquids and Qatargas liquefied natural gas plants in Qatar.

Jon Rigby, oil analyst at UBS, said: “The ‘big 3’ projects are delivering less than 50 per cent plateau production and Qatar less than 50 per cent of plateau cashflows, hence significant momentum remains.”

Shell said liquefied natural gas sales rose 12 per cent.

Shell’s chief financial officer Simon Henry said that the industry is beginning to see some signs of input cost inflation creeping back in after a period of falling oil services costs.

Analyst Tony Shepard, at Charles Stanley, said: “The third quarter results were ahead of expectations.

“An important part of Shell’s growth strategy is the delivery of new projects and this is moving ahead as planned.

“The main driver of the underlying increase in third quarter production was the start-up of projects in Qatar and Canada and these are part of the 20 new investments planned over 2011- 2014.”

Analyst Andrew Whittock, at Liberum Capital, put out a buy recommendation on Shell’s stock and said: “Overall, the third quarter results are better than expected.

“Delivery of medium term growth looks on track and we expect only small upward revisions to our forecasts for 2011.”

“We still believe that Shell, with higher volume growth, a higher yield and less US political risk, remains attractive relative to BP,” he added.

Major player in the UK

Shell claims to make a major contribution to the UK, both through its products and services and through employment, tax revenues and investment.

It employs around 7,000 people in the UK.

In the UK sector of the North Sea, Shell has interests in more than 50 fields and operates over 30 platform installations, 30 subsea installations, one FPSO vessel, three onshore gas plants and a marine terminal.

Shell produces almost 13 per cent of UK oil and gas.

Its downstream business has about 900 Shell-branded service stations, which serve half a million customers a day. It also operates the second largest refinery in the UK which produces a wide range of products including premium fuels.