Royal Dutch Shell has ambitious plans to increase production over the next few years, but some investors fear that the level of investment needed will crimp returns.
Aggressive strategies to increase reserves and grow future production always present a risk – as BG Group found to its cost earlier this week.
However, Questor feels confident this is the correct strategy for Shell to pursue. The company appears to be on track with its plans, despite a 1pc fall in production in the third quarter to 2.982m barrels of oil equivalent a day.
This was mostly down to temporary shutdowns in the North Sea and Gulf of Mexico. However, there were problems with security in its troublesome Nigerian operations, which forced some closures. Divestments also hit the numbers.
Shell's strategic plan builds on the group's increasing bias towards gas. Indeed, in the past three months, gas production rose 4pc and liquid output was down 4pc.
In the US, the company has adjusted its onshore strategy from shale gas to focus more on "tight oil" because of low gas prices.
Tight oil is found in porous rock formations and it is extracted in a similar process to shale gas, by hydraulic fracturing, or fracking.
US gas prices are down 29pc on a year-on-year basis. However, as the recovery gathers pace in the next few years and the US starts to export gas to energy-hungry Asian markets, prices should recover.
Because of the US gas issue, the group took a $354m (£219m) impairment charge in the quarter relating to "onshore gas properties in North America". This is much smaller than asset writedowns in other businesses that are involved in the industry.
BHP Billiton was forced into a $2.84bn charge, BG Group wrote down $1.3bn of assets in the sector and BP took a red pen to $2.1bn of its properties.
Shell's quarterly numbers were a touch ahead of expectations, with earnings on a current cost of supplies (CCS) basis coming in at $6.1bn, compared with $7.2bn in the equivalent period of last year.
This measure strips out changes in the value of oil inventories, which would otherwise skew the results to track movements in the oil price.
Taking out the one-off charges, this figure was $6.6bn, comfortably ahead of analysts' consensus of $6.3bn.The main reason for that was a boost in refining margins – something that the company admits is not sustainable.
Simon Henry, chief financial officer, noted that the improvement in margins was caused more by unexpected shutdowns at other refineries, rather than increasing demand. However, the most important thing for investors to consider about Shell is its cash generation.
The company's stated strategy is to improve cash flow by 50pc to $200bn over the 2012-15 period and by 2018 production is expected to be 4m barrels of oil equivalent a day compared with 3.2m in 2011.
Liquefied natural gas (LNG) will be a major contributor to future earnings, with a 4pc rise in sales in the third quarter to 4.97m tons boding well.
However, the dividend attractions remain. The quarterly dividend was increased by 1c to 43c and it will be paid on December 20. The shares trade without entitlement to this payment from November 14.
The prospective yield in 2013 is a healthy 5pc. The company has the scope to increase its payments, despite its ambitious capital expenditure plans. Gearing stood at just 8.6pc, down from 10.8pc a year ago, so borrowings are very low.
The shares have underperformed the FTSE 100 this year by around 9pc – so they are trading on a prospective earnings multiple of 8 next year.
For comparison, BG Group's multiple is 12.8. The fourth quarter of the year could be tough, with refining margins easing and the oil price remaining subdued.
However, successful delivery of the group's new projects should lead to capital appreciation over the next few years.
A global economic recovery will help the demand side of the equation, too – although this remains elusive right now. Last tipped as a buy on July 17 at £22.90½, the shares remain a buy for income and delivery on strategy.
telegraph.co.uk
Aggressive strategies to increase reserves and grow future production always present a risk – as BG Group found to its cost earlier this week.
However, Questor feels confident this is the correct strategy for Shell to pursue. The company appears to be on track with its plans, despite a 1pc fall in production in the third quarter to 2.982m barrels of oil equivalent a day.
This was mostly down to temporary shutdowns in the North Sea and Gulf of Mexico. However, there were problems with security in its troublesome Nigerian operations, which forced some closures. Divestments also hit the numbers.
Shell's strategic plan builds on the group's increasing bias towards gas. Indeed, in the past three months, gas production rose 4pc and liquid output was down 4pc.
In the US, the company has adjusted its onshore strategy from shale gas to focus more on "tight oil" because of low gas prices.
Tight oil is found in porous rock formations and it is extracted in a similar process to shale gas, by hydraulic fracturing, or fracking.
US gas prices are down 29pc on a year-on-year basis. However, as the recovery gathers pace in the next few years and the US starts to export gas to energy-hungry Asian markets, prices should recover.
Because of the US gas issue, the group took a $354m (£219m) impairment charge in the quarter relating to "onshore gas properties in North America". This is much smaller than asset writedowns in other businesses that are involved in the industry.
BHP Billiton was forced into a $2.84bn charge, BG Group wrote down $1.3bn of assets in the sector and BP took a red pen to $2.1bn of its properties.
Shell's quarterly numbers were a touch ahead of expectations, with earnings on a current cost of supplies (CCS) basis coming in at $6.1bn, compared with $7.2bn in the equivalent period of last year.
This measure strips out changes in the value of oil inventories, which would otherwise skew the results to track movements in the oil price.
Taking out the one-off charges, this figure was $6.6bn, comfortably ahead of analysts' consensus of $6.3bn.The main reason for that was a boost in refining margins – something that the company admits is not sustainable.
Simon Henry, chief financial officer, noted that the improvement in margins was caused more by unexpected shutdowns at other refineries, rather than increasing demand. However, the most important thing for investors to consider about Shell is its cash generation.
The company's stated strategy is to improve cash flow by 50pc to $200bn over the 2012-15 period and by 2018 production is expected to be 4m barrels of oil equivalent a day compared with 3.2m in 2011.
Liquefied natural gas (LNG) will be a major contributor to future earnings, with a 4pc rise in sales in the third quarter to 4.97m tons boding well.
However, the dividend attractions remain. The quarterly dividend was increased by 1c to 43c and it will be paid on December 20. The shares trade without entitlement to this payment from November 14.
The prospective yield in 2013 is a healthy 5pc. The company has the scope to increase its payments, despite its ambitious capital expenditure plans. Gearing stood at just 8.6pc, down from 10.8pc a year ago, so borrowings are very low.
The shares have underperformed the FTSE 100 this year by around 9pc – so they are trading on a prospective earnings multiple of 8 next year.
For comparison, BG Group's multiple is 12.8. The fourth quarter of the year could be tough, with refining margins easing and the oil price remaining subdued.
However, successful delivery of the group's new projects should lead to capital appreciation over the next few years.
A global economic recovery will help the demand side of the equation, too – although this remains elusive right now. Last tipped as a buy on July 17 at £22.90½, the shares remain a buy for income and delivery on strategy.
telegraph.co.uk
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