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Shell Bests Big Oil Peers, with LNG Volumes Climbing 10%

Royal Dutch Shell plc topped Wall Street forecasts with strong results across the board during the third quarter, perhaps affirming, as its Big Oil peers have done in recent days, that $50/bbl oil isn’t so bad.

Based on current cost of supplies, whose equivalent is U.S. net income, the Anglo-Dutch major posted profits of $4.1 billion (50 cents/share), versus $2.8 billion a year ago and $3.6 billion in 2Q2017. Consensus forecasts had estimated Shell’s earnings would hit $3.62 billion in 3Q2017.

Shell, the last to report among oil majors whose operations are weighted to North America, bested rival profits for the period, with ExxonMobil Corp. posting profits of $4 billion, Chevron Corp. coming in at $2 billion and BP plc at $1.9 billion.

Operational cash flow fell by one-third year/year to $7.58 billion, the first decline since 1Q2016, which Shell blamed on increases in the value of its oil and gas inventory as crude oil prices rose year/year. Excluding the build, cash flow was $10 billion, providing an ample cushion for capital expenditures and dividends.

All three business units -- upstream, downstream and chemicals -- contributed to the gains, said CEO Ben van Beurden. Like his Big Oil peers, van Beurden has guided Shell under the mantra that prices may be “lower forever.”

"Shell's three businesses all made resilient contributions to this strong set of results,” he said. “Upstream generated almost half of the $10 billion cash flow from operations, excluding working capital this quarter, at an average Brent oil price of $52/bbl, and this was complemented by good cash contributions from our growing integrated gas business and from downstream.

“This competitive performance is further evidence of Shell's growing momentum, and strengthens my firm belief that our strategy is working."

One day after closing more than $4 billion of asset sales overseas, CFO Jessica Uhl told investors on a conference call that Shell is tooled for future success as a “nimbler” performer.

Global realized liquids price averaged $47.06/bbl in 3Q2017, 16% higher than year-ago average prices of $40.43. Natural gas prices also climbed globally to average $4.15/Mcf in the period, which is 21% higher than the $3.42 it fetched in the year-ago period.

Production rose 2% year/year to 3.657 million boe.

The integrated gas segment’s profits jumped 98% year/year to $1.217 billion from $614 million.

Natural gas available for sale climbed 13% to 4.496 Bcf/d. Liquefied natural gas (LNG) volumes were 10% higher year/year at 8.45 million metric tons (mmt), while LNG sales volumes rose 11% to 16.97 mmt. Total production available for sale rose 10% to 1 million boe/d.

Integrated gas profits excluding one-time items benefited from higher oil, gas and LNG prices, as well as higher production and liquefaction volumes. Total production and LNG volumes increased mostly on production from the Chevron Corp.-operated Gorgon facility in Australia, which has three trains online versus one in the year-ago period.

LNG sales volumes reflected higher liquefaction volumes and increased trading of third-party volumes compared with the same quarter in 2016.

The LNG business is as strong as Shell expected, Uhl said.

“We believe gas will be the fastest growing hydrocarbon between 2020 and 2030, and we think that LNG will be the fastest growing gas molecule during that period of time,” she said. “We believe it's fundamental to the energy transition, it's fundamental to increasing energy supply that's very much needed and will continue to be needed as populations grow and quality of life increases across the planet.”

A lot of global LNG supply is coming on, she said, and “will continue to come on in the next one year to two years. So, far the market has absorbed that supply very well. In fact, we saw spot prices turning up in the quarter. So our experience has been a very strong market, and we're achieving good spot prices this quarter and in prior quarters and we’re feeling pretty confident in terms of the business...no negative headwinds, if you will.”

As the new LNG capacity comes onstream, it will need to be absorbed, and “looking into the 2020s, there haven't been a number of large final investment decisions, given what we expect to happen with the LNG market. We think there should be some tightening in the early 2020s. The exact date...I can't say, but...we remain confident in that business and our strategy with that business.”

Upstream earnings jumped 249% year/year to $575 million from a year-ago loss of $385 million. Cash flow climbed 17%. Meanwhile, capital spending fell 47% to $2.8 billion on drilling efficiencies and cutbacks.

From the upstream unit only, both natural gas (5.974 Bcf/d) and liquids (1.6 million b/d) available for sale fell 1% from a year ago.

New field startups and the continuing ramp-up of existing fields worldwide, including Stones, Olympus and Mars in the Gulf of Mexico, contributed almost 243,000 boe/d during 3Q2017, offsetting the impact of field declines and divestments.

Within the integrated gas unit during the third quarter, Shell completed the acquisition of Chevron Corp.’s subsidiary in Trinidad and Tobago, closed the sale of its 50% interest in the Kapuni asset in New Zealand, and acquired MP2 Energy LLC in the United States.

For the fourth quarter, Shell is anticipating integrated gas production volumes to be positively impacted by nearly 90,000 boe/d, mainly associated with Gorgon and portfolio impacts.

Upstream profits may decline by an estimated fall-off of 250,000 boe/d as Shell completes some asset sales, along with about 40,000 boe/d associated with maintenance activities.

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