Oil price boosts Shell

RESULTS: Sharp earnings hike at Shell is a contrast to the troubles at rival BP

July 30, 2010

With the price of Brent crude oil having risen to around $76 (£49) a barrel from $67 a year ago, it’s not surprising that Royal Dutch Shell reported a decent earnings hike at the half-year stage. Using the industry-standard "current cost of supply" (CCS) metric, which strips out inventory gains and losses, earnings grew an impressive 67 per cent to $9.43bn Total production rose 6 per cent in the period to 3.35m barrels of oil equivalent per day - with natural gas production up 12 per cent and crude oil production up 1 per cent.

IC TIP: Hold at 1716p

But there's rather more going on at Shell than just increased production and a higher oil price. Earnings, for instance, have been helped along by the successful completion of the group's so-called Transition 2009 programme – that delivered an underlying $3.5bn of cost savings, which exceeded the original target by around 15 per cent.

Management is now focusing on capital efficiency and plans to divest assets worth $7bn-$8bn in the period to 2010-11. Analysts at broker Collins Stewart reckon that programme can be pushed through without hitting the group's prodigious cash flow - management wants to grow cash flow by 80 per cent between 2009 and 2012. The group's performance on that score already looks impressive as operating cash flow grew 52 per cent year-on-year, to $12.9bn.

Even the group's downstream operations are looking healthier and second quarter CCS earnings there reached $1.47bn after a $275m loss in 2009. That reflected higher oil products marketing earnings, improved refining contributions and "significantly" better chemicals earnings.