Royal Dutch Shell plc’s third quarter global natural gas production climbed by 4% year/year, with liquefaction volumes jumping 9% as new fields ramped up in Australia and in Trinidad and Tobago.
The world’s No. 1 gas seller reported its quarterly results on Thursday. CEO Ben van Beurden was joined by CFO Jessical Uhl for a conference call to discuss results.
Uhl highlighted the strength of the Integrated Gas segment, which includes a diverse portfolio of liquefied natural gas (LNG) projects. Last year, Shell had about 20% of worldwide LNG sales, most matched with long-term sales agreements.
“The pricing of more than 80% of these term contracts is linked to the oil price, typically with three months to six months time lag,” Uhl said. Shell also purchases and sells LNG on the spot market, transactions that are “discretionary,” and vary from quarter to quarter.
Shell’s realized global gas price fell 15% year/year to $4.19/MMBtu from $4.92.
A strong performance in the segment during 3Q2019 “demonstrates our strength and trading and optimization, and it also shows how the current weak spot LNG prices have little impact on profitability in our business, with the oil price the main macro driver for the Integrated Gas results.”
LNG contract reviews, a normal feature of long-term contracting, differ from contract to contract, she noted.
“Contracts typically include terms detailing the timing of contract amendments and how revised pricing will be established,” the CFO said. “For example, while the contractual price formula may change, it would be extremely unusual for the underlying price indication to change from the price reviews that are currently ongoing in our portfolio. We do not expect a significant impact on this or next year's results.”
The Integrated Gas segment’s profits climbed year/year to $2.67 billion from $2.29 billion, even though global gas realizations were about 15% less than a year ago at $4.15/MMBtu.
Shell’s cash flow outlook already has taken into account anticipated changes from price reviews.
“Let's not lose sight of the long-term fundamentals of the LNG market,” Uhl said. “Natural gas plays a key role in the transition to a cleaner energy system,” and Shell expects demand to grow by about 4% a year. “We are planning to grow with it and keep our leading position.”
Not only does Shell expect LNG demand to increase, the producer foresees a supply gap emerging in the mid 2020s “once the current wave of new liquefaction capacity has been absorbed,” Uhl said.
“Consequently, we are seeing continued interest and long-term contracts from LNG buyers. In Hong Kong, for example, we recently signed a long-term agreement for the supply of LNG for the first LNG terminal that secured a new market in Asia.” It’s another sign of a “strong business and why we are committed to continue investing in our LNG portfolio to grow cash and returns.”
Shell’s quarterly earnings fell by 15% year/year, mostly because of lower prices and margins, van Beurden said. However, Shell still plans to buy back $25 billion in shares and reduce its net debt.
The CEO warned that the “prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback program within the 2020 timeframe.”
Total oil and gas production available for sale fell 1% year/year to 3.56 million boe.
The Anglo-Dutch major, which reports earnings on a net current cost of supply, similar to U.S. net income, said profits climbed to $6.08 billion (76 cents/share) in 3Q2019, up 9% versus year-ago earnings of $5.57 billion (67 cents).
Upstream profits overall were down at $907 million from year-ago earnings of $1.89 billion on lower commodity prices. Shell’s global liquids realizations declined 18% from a year ago to average $55.99/bbl. Operating expenses were down 7% at $8.65 million.