Royal Dutch Shell

Following hurricanes Katrina and Rita earlier this year, the full impact on oil majors like Royal Dutch Shell (RDSB) was largely unknown. Therefore we were heartened to learn in recent third quarter results that Shell achieved a record financial performance despite some disruption. For the quarter, earnings increased an impressive 68 percent to US$9,032 million. Exceptionally strong energy prices, refining margins and divestment gains more than offset lower production volumes and marketing margins.

Earnings on a current cost of supplies (CCS) basis rose 68 percent to US$7,369 million. However, production declined 11 percent on last year to 3.2 million barrels of oil equivalent per day (boepd) due to hurricane interruptions, divestments, and the end of a large production sharing contract. Full year production is forecast to be 3.5 million boepd, and between 3.5 and 3.8 in 2006.

Third quarter CCS earnings at the Exploration and Production (E&P) division increased a healthy 112 percent to US$4,977 million. Strong energy prices and gains from the sale of pipeline assets more than offset lower volumes and higher costs. While field declines (179,000 boepd) are still outstripping new field production (90,000 boepd), we are encouraged by Shell's successful appraisal drilling programme and rising exploration acreage via licence acquisition. We believe these activities are crucial to increasing the group's production profile and reserves.

Excluding the effects of US$94 million from the 2004-06 divestment programme, the Gas & Power business increased CCS earnings a robust 84 percent to US$556 million. The group benefited from both higher liquefied natural gas (LNG) prices and volumes. LNG production will soon be getting a shot in the arm as projects in Nigeria and Oman come on stream.

Shell's refining and marketing business, Oil Products, generated a respectable 13 percent increase in CCS earnings to US$1,726 million. Strong refining margins more than offset lower retail margins and volumes. While the other downstream business, the Chemicals group, saw CCS earnings declining 44 percent to US$321 million. Underlying earnings declined 12 percent due to higher feedstock costs and hurricane related downtime.

The earnings impact of this autumn's hurricanes in the Gulf of Mexico could have been far worse in our opinion. The total cost has been estimated at US$350 million, divided almost equally between 2005 and 2006. Mitigating the impact will be an as yet to be determined sum to be recovered from insurance.

Energy prices are likely to stay high in our opinion despite a recent correction. Underpinning prices will be robust global demand, the onset of the Northern Hemisphere winter, and tight supply. With a steadily rising production profile and refining capabilities, Shell is well positioned to benefit from these market conditions in our view.