Royal Dutch Shell posted record annual profit yesterday, beating forecasts, but pointed to tough times ahead by issuing reduced growth targets and forecasting higher costs and lower refining margins.
Shell said its fourth-quarter current cost of supply (CCS) net profit, which strips out changes in the value of inventory, rose 11 per cent to $6 billion, thanks to higher output, strong oil prices and profit from disposals.
For 2006 as a whole, CCS profit was up 12 per cent at $25.4 billion, a UK corporate record, analysts said.
Shell's London-listed A shares traded 2.5 per cent higher at 1,757 pence at 1125 GMT, outperforming a 1.7 pe cent rise in the DJ Stoxx European oil and gas sector index.
"Overall Q4 results were resilient but annual earnings of $25.4 billion could be the peak in this earnings cycle," Tony Shepard at brokerage Charles Stanley said.
The second-largest Western oil company by market value after Exxon Mobil Corp., Shell said fourth-quarter production rose 4.1 per cent to 3.645 million barrels of oil equivalent per day (boepd).
Full-year output was down 1.3 per cent at 3.47 million boepd, largely due to strife in Nigeria which has shut in fields.
Chief Executive Officer Jeroen van der Veer said the problems in Nigeria, rising field costs and intense competition in accessing resources forced Shell to drop a 2009 output target of 3.8-4 million boepd.
Shell now expects production growth of one to two per cent to the end of the decade and two to three per cent in the next, with much growth coming from oil sands and natural gas projects, which some analysts believe offer lower margins than oil.
Shell's goals are below the growth levels targeted by rivals such as London-based BP Plc and France's Total SA, although many companies have struggled to meet their targets in the past two years.
Mr Van der Veer said despite the anaemic growth projections, Shell was still focused on growing organically rather than through acquisitions.
The industry is buzzing with talk about consolidation, with some analysts saying mega-mergers, such as a tie up between Shell and BP, could be on the horizon.
Shell said the planned sale of a controlling stake in the giant Sakhalin-2 project in Russia to Gazprom, after Kremlin pressure on the project, would slice 400 million barrels off the its reserves base, and hit production levels.
Excluding Sakhalin, Shell's reserves replacement ratio (RRR) - the rate at which it matches production with new finds - was 150 per cent in 2006, including oil-sands projects.
Shell executives refused to divulge a figure for oil and gas reserves based on a US Securities and Exchange Commission basis, which excludes oil-sands projects but which is the measure most watched by investors.
Analysts calculated the rate at 120-130 per cent, higher than in recent years when it was below 100 percent.
"What is especially important is that the reserve replacement ratio is higher than 100 per cent," said FBS Bankiers analyst Jaap Barendregt.
Excluding non-operating items like asset sales, underlying fourth-quarter profit was $5.5 billion, above an average forecast of $5.216 billion in a Reuters poll of 10 analysts. Investors consider the pre-exceptional CCS result as the best measure of Shell's underlying performance.
The fourth-quarter earnings rise was powered by the upstream division, which in addition to higher output, benefited from higher oil prices. Refining profits dropped, as margins narrowed, and refining boss Rob Routs said he expected these to narrow further in coming years.
Shell announced a fourth-quarter dividend of 25 euro cents per share, up nine per cent, and said that from 2007 it would declare its dividends in dollars.
The company flagged a first quarter dividend of 36 US cents, up 14 per cent, and Chief Financial Officer Peter Voser said Shell would continue to favour dividends over buybacks.