Royal Dutch Shell

On July 20, 2005, Shell Transport & Trading (SHEL) began trading as Royal Dutch Shell (RDSB). While the name may have changed, the impressive results have not. Second quarter figures released two weeks ago showed earnings increased 34 percent to US$5,236 million. The common themes supporting the robust result were continued high energy prices and buoyant refining margins, accompanied by steady production.

On a current cost of supplies (CCS) basis, Royal Dutch Shell's earnings for the quarter rose 26 percent to US$4,626 million. Production was 3.5 million barrels of oil equivalent per day (boepd), which, excluding divestments and the end of a production sharing contract, signified a 2 percent increase.

At the Exploration and Production division CCS earnings increased a robust 48 percent to US$2,745 million reflecting a 42 and 31 percent increase in oil and gas prices respectively. We were also encouraged to learn that exploration expenditure will be increased by US$1.8 billion in 2005 and 2006.

A recent major development for Royal Dutch Shell was the signing of a memorandum of understanding with Russia's Gazprom involving the massive Sakhalin II venture. Resource estimates of Sakhalin II are 17.3 trillion cubic feet of gas and 1 billion barrels of oil. The agreement entails RDSB exchanging 25 percent (plus one share) of Sakhalin II for a 50 percent share in the Western Siberia Zapolyarnoye Necomian field.

Oil Products, the refining business, has continued to perform strongly. Earnings on a CCS basis increased 48 percent to US$2,664 million, as refining margins and utilisation rates more than offset lower retail margins and marketing sales volumes.

Royal Dutch Shell's impressive operating performance boosted cash flow a healthy 22 percent to US$6,322 million. Having suspended the share buyback programme during the corporate restructuring, RDSB confirmed the target of buying back US$3 to US$5 billion worth of shares.

In our opinion Royal Dutch Shell offers excellent value, trading on a 2005 price earnings ratio of 11 times, while offering a generous dividend yield. In the year ahead, we expect earnings growth will continue to benefit from the current market trends of strong oil prices and robust refining margins.