Shell Q3 cash boom clouded by cost rises, softer output

Shell said Thursday it expected sustained increases in high-value upstream production despite a dip in its third-quarter output, as well as a $500 million impairment relating to lower expectations of its ultra-deepwater Stones field in the Gulf of Mexico.

Higher oil prices propelled a jump in cash flow and profit for Shell in Q3, as for its peers. Cash flow from operating activities was up 59% year on year at $12.1 billion. It also improved its return on average capital employed, to 8.7%. 

But there were some clouds on the horizon. CFO Jessica Uhl noted the return of cost increases, telling journalists the cost environment, particularly wage levels, had become tougher.

And despite higher oil prices, Shell's integrated gas unit, which oversees its LNG business, made more money than its traditional upstream business, with net profit of $2.3 billion for integrated gas, against $1.9 billion in the upstream unit.

Shell's overall oil and gas production fell by 2% year on year to 3.60 million b/d of oil equivalent, with production from the integrated gas unit falling 8% to 924,000 boe/d due to maintenance, and upstream liquids output falling 1% to 1.60 million b/d.

In the current quarter lower maintenance should boost upstream output by 80,000-120,000 boe/d compared with a year ago, when it reached 2.78 million boe/d, Shell said.

Uhl highlighted the start of production in recent days at the P-69 floating facility at Brazil's Lula field, in which Shell holds a 25% stake. She said another Brazilian FPSO should start up by year-end and two more next year.

Shell will also launch production from Appomattox in the Gulf of Mexico next year, and start production from the Prelude floating LNG facility offshore Australia around the end of this year, she said.

But geological factors have curbed expectations of the Stones field, which came on stream barely two years ago with an output capacity of 50,000 b/d and was dubbed the world's deepest oil and gas project, in 2,900 meters of water.

Uhl said it was the cost and value of production that was important and Shell had "taken out" 200,000 boe/d of lower-value capacity in the year up to the third quarter. New projects delivered since 2014 had contributed $9 billion in operating cash flow over the first nine months of this year, she said.

In the upstream, "you do see underlying growth ? we expect that growth to continue," she said. "We have a number of projects coming on stream so we would be expecting those numbers to increase and importantly, for our cash flow to continue to increase."

On Stones, which Uhl had highlighted a year ago as a source of growth, she said: "It largely relates to our reservoir understanding and some exploration results where we thought there might be some further production that would be associated with the asset that does not look like it is coming through."

COST ESCALATION

On the cost environment, Uhl reiterated Shell's view of the North Sea as a model of efficiency improvement, but said that, globally, "we are seeing inflation".

"We are doing everything we can to offset it. I would not say it has materially changed our outlook, but we are seeing wage inflation and inflation affecting the supply chain and we are actively managing it. The perspective in the organization is to absorb inflation in our costs going forward...but it is certainly getting a bit tougher than it was, let us say a year or two ago."

In the downstream, Shell's net profit fell by 25% on the year to $2.01 billion, with a steep reduction in refining and trading.

Uhl highlighted the commissioning last month of a new deasphalter at the Pernis refinery in the Netherlands, intended to help provide marine fuel compliant with new sulfur regulations.

Shell's overall profit after oil inventory changes was up 51% on the year at $5.57 billion. Its gearing at the end of the quarter was 23.1%, down from 23.6% three months earlier.

Uhl said Shell was "on track" to increase return on average capital employed to 10% in 2020, and to reduce its gearing.