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Nigeria weighs on Shell's earnings

RESULT: Oil theft and gas supply disruptions in Nigeria have weighed on Shell's second-quarter earnings.
August 1, 2013

Royal Dutch Shell's (RDSB) half-year earnings have deteriorated markedly through a number of factors, including oil theft and gas supply disruptions in Nigeria. But at least shareholders have benefited from another steady rise in the half-year payout. The Anglo-Dutch giant is also on track to return $4bn-$5bn (£2.6-£3.3bn) to investors through share buybacks this year.

IC TIP: Buy at 2225p

Shell's problems in Nigeria were compounded by rising costs and exploration write-offs throughout the six-month period. The oil giant was also hit by a $0.45bn currency hit on a deferred tax liability due to the weakening Australian dollar. The combined effect was reflected in second-quarter earnings, which were down by a fifth on the comparable period in 2012 to $4.6bn on a current cost of supplies (CCS) basis, which excludes a one-off net charge of $2.2bn linked primarily to impairments on the group's Italian business and liquids-rich shale assets in North America. During the quarter, the group generated operating cash flow (excluding working capital movements) of $8.4bn, down from $9.5bn in the same period last year. The overall decline in Shell's profitability at the half-year mark wasn't quite so severe, though, with CCS net profits down by 7 per cent to $12.1bn.

The outages from Shell's operations in the Niger Delta knocked around 100,000 barrels of oil equivalent (boe) off daily second-quarter production, bringing the average rate to 3.03m boe, a slight decline on comparable 2012 volumes, although natural gas output actually improved by 5 per cent on stronger MENA (Middle East and North Africa) gas volumes. In terms of comparative pricing, there was an 8 per cent decline in realisations for crude/condensates for the half year, but a strong market recovery in the Americas, and higher-margin volumes from Pearl GTL in Qatar, helped drive up Shell's natural gas receipts by 11 per cent over the period.

Net capital investment for 2013 is expected to hit $40bn, including the impact of the Repsol LNG acquisition announced in February, although these results make clear that the group's focus is now on financial efficiency rather than increasing production volumes.

Broker Investec Securities expects to downgrade its 2013 EPS forecast of 415.8¢ by around 5 per cent (401¢ in 2012).

ROYAL DUTCH SHELL (RDSB)
ORD PRICE:2,225pMARKET VALUE:£138bn*
TOUCH:2,224-2,225p12-MONTH HIGH:2,375pLOW: 2,092p
DIVIDEND YIELD:5.2%PE RATIO:8
NET ASSET VALUE:2,808¢*NET DEBT:11%

Half-year to 30 JunTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
2012**23725.42.0686
201322518.71.5790
% change-5-26-24+5

Ex-div: 14 Aug

Payment: 26 Sep

*Reflects both 'A' and 'B' shares **Restated £1=$1.52