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Shell Smashes Forecasts as Profits Soar, LNG Sales Volumes Climb 29%

Royal Dutch Shell plc roundly beat earnings forecasts for the first quarter, posting a 300%-plus increase in profits from a year ago, while its decision to capture more of the global natural gas market paid handsome dividends.

Based on the European-based major's current cost of supplies (CCS), earnings increased to $3.38 billion (43 cents/share) from year-ago profits of $484 million (11 cents). Net income, also based on CCS but not taking into account one-time items, improved by 136% to $3.86 billion, ahead of average analyst estimates of $3.05 billion net. Cash flow from operations was 1,338% higher year/year to $9.51 billion. Upstream earnings of $540 million reversed a year-ago loss of $1.44 billion, while downstream profits increased to $2.5 billion from $2.0 billion.

The strong results followed a first quarter pattern set by peers that include ExxonMobil Corp., Chevron Corp. and BP plc.

"The first quarter 2017 was a strong quarter for Shell," CEO Ben van Beurden said. "We saw notable improvements in upstream and chemicals, which benefited from improved operational performance and better market conditions." He also noted that Pearl, Shell's massive gas-to-liquids facility in Qatar, restarted in the second quarter.

"We continue to reshape Shell's portfolio and to transform the company with over $20 billion divestments completed or announced that will strengthen the balance sheet as they are completed. The strategy we have outlined to deliver a world-class investment case is taking shape. Following the successful integration of BG, we are rapidly transforming Shell through the consistent and disciplined execution of our strategy. This includes investing around $25 billion this year and the delivery of new projects, which we expect to generate $10 billion in cash flow from operating activities by 2018."

Total production available for sale increased year/year by 2% to 3.7 billion boe/d. Realized liquids prices jumped 64% yto $48.36/bbl, while global natural gas realized prices were 10% higher at $4.29/Mcf. Meanwhile, operating expenses fell 8% from a year ago.

Shell's integrated gas unit benefited from higher realized oil, gas, and liquefied natural gas (LNG) prices, higher LNG volumes and increased contributions from trading, which more than offset impacts from lower liquids production.

In the integrated gas division, Shell reported a 101% earnings increase from a year ago to $1.82 billion, while operating cash flow declined 27% to $1.85 billion.

Overall natural gas production available for sale fell 6% to 3.32 MMcf/d, and liquids output decreased 25% to 169,000 b/d. Total output was down 11% to 741,000 boe/d. Production volumes overall decreased mainly because of the controlled shutdown at Pearl. Newbuild start-ups and the continuing ramp-up of existing fields, in particular the Chevron-operated Gorgon LNG facility in Australia, contributed 62,000 boe/d to production from a year ago.

Meanwhile, LNG liquefaction volumes jumped year/year by 16% to 8.18 million metric tons (mmt), while LNG sales volumes increased by 29% to 15.84 mmt.

Newly installed CFO Jessica Uhl, oversaw a wide-ranging conference call and was asked about Shell's languishing North American LNG business. The LNG Canada project is still on the drawing board, although Shell early last year delayed a final investment decision indefinitely. Shell in March pulled the plug on another British Columbia-based project, Prince Rupert.

"We believe we've got very competitive options in North America and in other places as well," Uhl said of Shell's global list of LNG proposals. "We've got a number of good opportunities that we're continuing to work, and we believe we put very competitive targets on the organization in terms of ensuring that the next project we sanction is the most competitive project in the industry. That's what we're aiming for.

"We're being very diligent in terms of how we're approaching these projects, both in terms of the design and execution and the timing," she said. "We're making sure we bring all of that together to ensure we pick the right project from a suite of very good projects that we have, which allows us to have some good options on the table...We'll make those choices in the next couple of years, when the timing's right and the project is right."

Specifically in the Lower 48, Uhl said the Permian Basin was proving to be a big plus for the company. Shell and its partners, which include Anadarko Petroleum Corp., have "15 to 20 rigs in the Permian" today, "fairly strong, stable activity that will continue through the year...These are great assets that provide us with some flexibility and options...Right now, we're comfortable with that level of activity, with more volumes coming through this year and next." 

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