Production growth, acquisitions and other factors are improving results for energy firms despite today’s highly complex regulatory environment, analysts say.
Robert Plexman, CFABC World Markets [email protected]
Area of coverage: Oil and gas
Sector outlook: After weakening in the first quarter of 2007, crude benchmark prices recovered sharply in the second quarter of 2007. WTI and Brent prices in were 12 percent and 17 percent higher quarter over quarter, respectively.
The second quarter of 2007 was a quarter of exceptional downstream strength, as reflected in the strength of refining margins. A key refinery crack spread, the NYMEX 3-2-1 spread, averaged $24.37 per barrel in the quarter, nearly double the first quarter 2007 average. Sour processing economics were also favorable, with the U.S. Gulf Coast coking spread averaging $27.21 per barrel in the second quarter.
About Royal Dutch Shell (RDS-A): Royal Dutch Shell reported earnings from operations per ADR of $2.19, and $2.40 on a total reported basis in the second quarter of 2007. The latest results were in line with the consensus outlook but below our estimate. Petroleum products results were better than expected, but our outlook for the upstream was too optimistic.
Combined oil and gas output averaged 3.178 million barrels of oil equivalents per day (boe/d) in the second quarter of 2007. Production guidance for 3.3 million to 3.5 million boe/d for 2007 is unchanged, but management indicates that the actual result will likely be at the lower end of the range.
The company is in the early stages of reestablishing a stronger upstream presence by pursuing opportunities in more technically complex areas such as oil sands and gas-to-liquids. Reliability and the efficiency of the petroleum products operations have improved.
Production growth prospects appear limited over the near term, and there is a risk that legacy assets may suffer from natural decline before the new projects have an impact. In the meantime, a relatively attractive dividend rate of $2.88 per ADR should provide support for the stock, in our view.
Shell has reiterated its 3.3 million to 3.5 million boe/d guidance range for 2007 but indicated that it expects to track the lower end of this range.
Longer term, Shell highlighted that all of its key projects remain on track. Roughly speaking, Royal Dutch expects about 296,000 boe/d of new production to start up over 2007-2008. However, taking natural declines into account, Shell’s stated production growth expectation for the 2007-2010 horizon is 1 percent to 2 percent per year and believes that a 2 percent to 3 percent growth rate can be sustained thereafter.
In the upstream, Shell has made four major discoveries in the first half of 2007, two in Australia and one each in Nigeria and Malaysia. The company has continued to increase its acreage in Australia and the United States.
Shell continues to refocus its portfolio, selling non-core assets and building positions in long-life assets and key growth markets. In this vein, Shell decided to sell its interests in several mature northern North Sea assets in the second quarter of 2007. It also completed the sale of the Los Angeles Refinery, the Wilmington Products Terminal and about 250 retail sites in the United States.
In Malaysia, Shell plans to buy Conoco Jet, the wholly owned subsidiary of ConocoPhillips (COP) that will give it access to 44 branded retail service stations and 14 vacant land sites.
Shell’s recent $7.1 billion acquisition of its Canadian subsidiary was also in line with this portfolio refocusing strategy. Shell highlighted that with this purchase it has bought about 60.0 billion barrels of reserves in place. The integration of Canadian subsidiary appears to going smoothly, and Shell reiterated its goal for $500 million worth of pre-tax savings from the acquisition.
In the second quarter of 2007, Shell’s stake in the Russian Sakhalin project was halved to 27.5 percent for a price $4.1 billion.
Robert LaneSanders, Morris, Harris [email protected]
Area of coverage: Natural resource MLPs
Sector outlook: We are still seeing construction of new coal-fired electricity, and we are trying to make coal burn cleaner. One of those processes is the production of synthetic fuels. It’s a process that’s 60 years old. The success of the process depends on who you are talking to. The firms trying to introduce the process say it’s going well.