Shell plans aggressive exploration investment, misses earnings goals

Royal Dutch Shell plans to continue with its aggressive investment programs in the year ahead, even as its fourth-quarter performance fell short of expectations.

The Netherlands-based company reported $6.7 billion in earnings fourth-quarter, an increase over $6.5 billion this time the previous year, but lower than the company had expected.

“Quarterly earnings are important, but they are only a snapshot of a much larger picture,” said Simon Henry, Royal Dutch Shell’s chief financial officer at the earnings call, explaining that Shell’s emphasis on capital investment will pay off handsomely in steep cash flow growth within three years.

Shell earned $26.6 billion in 2012, down 14 percent from 2011, with 2012 revenue of $467 billion, down slightly from $470 billion in 2011. The company had $118 billion of revenue for the fourth quarter of 2012, which also increased slightly from its $116 revenue for the same period in 2011.

The company has planned ambitious exploration strategies to achieve these goals, and has spent more than $5 billion on its controversial Arctic exploration and on places like Kazakhstan and Qatar.

Shell plans to continue investing heavily in complex projects like the Arctic, with a $33 billion capital investments budget this year, up 10 percent from $30 billion in 2012.

“We are maximizing value by investing in new production and driving our long-term growth with exploration,” said Peter Voser, CEO of Shell, at the earnings call.

Fifteen new exploration fields will come online in the next two years, Voser said. Shell will continue to focus on deep water projects, heavy oil and natural gas, as it looks to replace declining production in its more mature fields.

While Alaska has not had an immediate payoff, other projects boosted volumes in the fourth quarter to 3.41 million barrels of oil or natural gas equivalent per day.

“Our strategy is delivering results,” said Peter Voser, CEO of Shell at the earnings call. “We are one year into the strategic targets and we are on track, even with the head winds of 2012,” noting that the company is planning for 30 to 50 percent higher cash flow by 2015.

But while the increased investment has raised production levels, costs from Alaska and other expensive ventures dampened fourth quarter upstream business. Shell earned $4.38 billion in its upstream segment, down from its $5.1 billion earnings the same time the previous year.

Shell’s downstream business has benefited from relatively low crude oil prices in the US, which has provided a boon to refineries along the Gulf Coast. It reported earnings of $1.2 billion for the fourth quarter, up from a loss of $278 million for the same time in 2011.

Shell is focusing on “getting the investment dollars to the best new projects,” Henry said at the call. It sold $21 billion of assets in 2012, including late-life and other assets that do not fit the company’s strategy, as it chose instead to invest in “exciting new projects with strong growth projections”.

This week Shell also announced a project with pipeline company Kinder Morgan to export liquefied natural gas, or LNG, from the U.S.