Royal Dutch Shell reported better-than-expected production growth during the first quarter which, combined with higher oil prices, led to a 60% gain in adjusted earnings, to $4.8 billion from $3.0 billion earned a year ago. For the first time in several quarters, Shell boosted its oil and gas production by 6% during the first quarter over year-ago levels. This should help the firm turn the corner after several years of annual production declines, and achieve targeted production growth of 11% by 2012 from 2009 levels. New field startups including Shell's Perdido Development in the deepwater Gulf of Mexico, and production ramp-up in Nigeria helped to offset mature field declines. Projects underway could drive up production later this year, potentially exceeding Shell's flat production goal set for 2010. Our model already assumes some annual production growth for Shell and we will not change our fair value estimate at this time.
A weakened refining market continues to pressure downstream earnings, but improvement at the chemicals division offers signs of some returning demand. Downstream asset sales and cost-cutting efforts continue with the recently announced sale of Shell's New Zealand downstream business for $0.5 billion. Negotiations are underway with several companies, including ExxonMobil, on some European refineries. Shell restated its desire to hold off from fire sale prices for its downstream assets, and would consider converting facilities to terminals. Managers during the analyst call reaffirmed flat dividend guidance for 2010 due to cash needs for projects, but hinted the firm could revisit dividends if cash flow significantly improves.
Catharina Milostan is an equity analyst for Morningstar.