Shell for the long term

Given its size, it's impressive how rapidly Shell has transformed its operational profile. Out of all the major integrated oil producers, it has reacted most effectively to industry trends. And the case for buying its shares - the combination of dividend yield and the low-risk growth that the company offers - was made all the more compelling by the results for the first half of 2011.

City analysts were certainly impressed by Shell's performance, even though there was a 2 per cent fall in second-quarter production volumes. The decline - to 3.05m barrels of oil equivalent (boe) a day - was partly attributable to $4bn in asset sales undertaken by Shell to provide a sharper focus on its core growth projects. Besides, like-for-like output from Shell's remaining assets ticked-up by 2.5 per cent over the period, with start-up wells contributing 285,000 boe daily, which more than made up for natural attrition.

Strong oil prices boosted second-quarter replacement-cost profits by 56 per cent year-on-year to $6.6bn (£4.05bn), slightly ahead of City expectations, while operating cash flow surged 45 per cent to $18.7bn for the whole of the first half. The favourable trading environment has improved Shell's already robust finances. Since the start of the year, net debt has fallen by a third and the group's cash is up 45 per cent to $19.5bn.

Yet the potential of Shell's development portfolio is the basis for optimism about the longer term. Peter Voser, Shell's chief executive, confirmed that "the ramp-up of our new projects should drive our financial performance in the coming quarters". True, for many years Shell consistently failed to replace the oil and gas it produced with new reserves. But now Shell's clearly defined growth objectives provide a sharp contrast to, for example, BP's uncertainty following last April's disaster in the Gulf of Mexico.

So far this year, Shell has begun nine new upstream projects, and has spent 8 per cent of its projected $100bn-worth of capital investment by the end of 2014. This investment is being undertaken with the aim of driving daily production to 3.7m boe and it will be assisted by several of the group's high profile growth projects coming onstream this year.

For example, Shell's much-vaunted Pearl gas-to-liquids project in Qatar sold its first shipment of GTL gas oil during the second quarter. Meanwhile, another Qatari project - Qatargas 4 - was brought into production during the early part of this year and has already reached its initial annual output of 7.8m tonnes of liquid natural gas.

As the Pearl project demonstrates, Shell has taken significant steps to diversify its resource mix in favour of unconventional sources. As part of a Canadian oil sands joint venture, Shell is now on target to expand capacity at its Scotford Upgrader, which processes heavy bitumen into a range of synthetic crude oils.

Management anticipates that the $30bn that it has poured into these three projects will deliver a 13 per cent rise in daily production. Another source of revenue growth is provided by Shell's decision to press ahead with the development of a unique floating liquefied natural gas platform in Australia, which will tap in to an estimated three trillion cubic feet of gas contained in the Prelude gas field off the coast of western Australia.

The scale and breadth of such projects suggests that, by the end of this decade, Shell will be a very different beast in terms of its product mix and volumes. It may have already stolen a march on its rivals, but expect more such diversification and expansion.