Shell Profit Rises 22%, Delays Oil Sands Decision

By Fred Pals

Oct. 30 (Bloomberg) -- Royal Dutch Shell Plc, Europe's biggest oil company, reported a 22 percent increase in third- quarter profit and said it will delay an investment decision on its Athabasca oil-sands project in Alberta because of costs.

Net income advanced to $8.45 billion, or $1.37 a share, from $6.92 billion, or $1.10, a year earlier as record crude oil prices offset production cuts in Nigeria and the Gulf of Mexico, the company said today in a statement. Shell fell as much as 3.4 percent in London trading, after rising 12 percent yesterday to a five-week high.

Shell is pressing ahead with the first expansion phase of its Athabasca Canadian oil-sands project, while putting further investment there on hold because of high local construction costs. The company expects 250,000 barrels of new oil production by the end of next year, helped by winter oil output from its Sakhalin project in Russia's Far East coming on line soon.

``Given the credit crisis and current capital costs for oil sands projects, Shell is taking a more prudent approach when it comes to spending and allocation of its capital,'' said Dirk Hoozemans, who helps manage the equivalent of $23.8 billion, including Shell shares, at Rotterdam-based Robeco. ``In the short term this will also benefit returns on capital employed.''

Inflated Labor Costs

Extraction of crude from oil sands is more expensive than from more conventional sites. Shell said it remains committed to ``long-term'' projects and decides investments based on local costs and labor availability as well as the oil price.

``We had in mind to decide on the second expansion in 2009,'' Chief Executive Officer Jeroen Van Der Veer told journalists on a conference call today. ``But at this moment, if you look at the combination of inflated labor costs and raw material prices in the form of equipment, we felt that we had better delay that.''

Excluding gains or losses from inventories and one-time items, third-quarter profit was $8.04 billion, with gains of $800 million in additional fair-value adjustments. The median estimate of 10 analysts surveyed by Bloomberg was $7.22 billion.

Earnings were boosted by crude's surge to a record high of $147.27 in New York on July 11. Oil has since slumped more than 50 percent. Militant attacks in Nigeria forced Shell to shut in production and Hurricanes Gustav and Ike swept through the Gulf of Mexico, leading to the shutdown of platforms.

``The downstream results are particularly strong compared to others in the sector and upstream was also better than expected,'' Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh who has a ``buy'' rating on the stock, said in a telephone interview today.

Production Falls

Third-quarter crude and natural-gas output fell 6.6 percent and dropped to below 3 million barrels of oil equivalent a day for the first time in more than a decade. Total production, including bitumen from oil sands, was 2.93 million barrels of oil equivalent a day, down from 3.14 million barrels a year earlier. That missed the estimate of 2.95 million barrels, according to a Bloomberg News survey of six analysts.

The company maintained its outlook for annual production growth of two percent to three percent for the next 10 years, Chief Financial Officer Peter Voser said on the conference call.

The last time The Hague-based Shell reported daily production of less than 3 million barrels was in 1991, according to a research note of Sanford Bernstein & Co on Oct. 21.

Stock Move

Shell's London-listed Class A shares fell as much as 58 pence to 1,647 pence and were trading at 1,660 pence at 12:34 p.m. local time.

``Shares of the oil majors have rebounded sharply over the past 10 days,'' said Bertrand Hodee, an analyst at Kepler CM with a ``buy'' rating on Shell, by telephone from Paris. Investors in oil stocks are selling because ``they want to take their profit,'' he said.

Shares of Shell have gained 10 percent in the past two weeks, compared with a 2.8 percent gain of the 40-company Dow Jones Europe Stoxx Oil & Gas Index of which Shell is a member.

As of yesterday's close, Shell was down 19 percent this year. That compared with an 18 percent decline for BP Plc, Europe's second-biggest oil producer, which this week reported a third-quarter profit of $8.88 billion, more than the $6.82 billion median estimate from 10 analysts in a Bloomberg survey.

New Chief

Shell said yesterday Voser will take over as chief executive officer in July. Voser, 50, will succeed Jeroen van der Veer, who is due to retire. Van der Veer, 61, stayed on beyond the normal retirement age in the Netherlands after restoring investor confidence at the company following a reserves scandal in 2004.

Shell announced a third-quarter dividend of 40 cents per A and B ordinary share, an increase of 11 percent over the comparable year-earlier dividend. The dividend payment is as expected, Kenney of ING said.

Of the 35 analysts tracked by Bloomberg who cover Shell, 23 recommend buying the shares, eight advise holding the stock and four say ``sell.''

Exxon Mobil Corp., the world's biggest oil company, said today third-quarter profit jumped 58 percent to $14.8 billion as record oil prices more than made up for the largest decline in production in at least a decade.

Shell plans to counter lost production in Nigeria and Russia by mining Canadian oil sands and developing a Qatari gas- to-liquids venture. The ``unconventional'' projects are designed to replace aging fields as high oil prices encourage energy-rich nations to hold onto a bigger slice of their resources. The company's output has fallen in the past five years.

Shell said it expects its Sakhalin project to start winter oil production soon and said a second Sakhalin liquefied natural gas train would be ready ``shortly.'' It said it expects Sakhalin to contribute to earnings in 2009.

BP's Global Indicator Margin, a broad measure of refining profitability, averaged $8.03 a barrel in the third quarter, unchanged from a year earlier, according to BP's Web site.

To contact the reporter on this story: Fred Pals in Amsterdam at fpals@bloomberg.net