Shell profit sets UK company record

By Tom Bergin
LONDON (Reuters) - Royal Dutch Shell posted a $23 billion (13 billion pound) profit for 2005 on Thursday, a record profit for a UK-listed company, as higher oil prices and fat refining margins outweighed a sharp fall in production.

Shell said in a statement that current cost of supply (CCS) net profit, which excludes unrealised inventory gains, rose 3 percent to $5.395 billion in the fourth quarter.
Excluding exceptional items that resulted in a net gain of $34 million, the ''clean'' figure was in line with an average forecast of $5.385 billion in a Reuters poll of 10 analysts.
Analysts consider the ''clean'' net income figure as the best measure of an oil firm's underlying health.
Shares in the world's third-biggest listed oil company by market value fell, however, as investors focussed on its weak performance upstream in finding oil and gas.
''Shell has had another poor performance with the drill bit,'' said Peter Hitchens, an oil analyst at Teather & Greenwood.
Investors were also disappointed, because Shell failed to copy Exxon Mobil in beating market forecasts earlier this week, when the U.S. major also posted a record $36 billion annual profit.
''The figures were fine, but didn't sparkle like Exxon's,'' said Brendan Wilders, an oil analyst at Oriel Securities.
In London, Shell ''A'' shares fell 1.6 percent to 1,881 pence at 11 a.m., outpacing a 0.8 percent fall in the DJ Stoxx European oil and gas sector index <.SXEP>.
NEW UK RECORD
All the oil majors are expected to report bumper results for 2005 thanks to prices that reached a record above $70 per barrel during the year and to record refining margins.
Shell's $22.94 billion CCS result for 2005 is also a record annual profit for a UK-listed company, analysts said, beating the previous record of $17 billion reported by Shell for 2004.
Its exploration and production business was the main profit driver, with earnings jumping 22 percent in the fourth quarter compared with a year earlier.
This came even though production fell to 3.5 million barrels of oil equivalent per day (boepd) from 3.84 million boepd in the fourth quarter of 2004. Hurricanes hit its production hard in the Gulf of Mexico in the past two quarters.
Shell replaced just 60 to 70 percent of the oil it pumped with new additions to reserves, measured under Securities and Exchange Commission rules, a Shell spokesman said.
This is well below the 100 percent rate needed to stop an oil firm's asset base from shrinking.
It is up, however, from its rate of 49 percent in 2004 excluding divestments, or 19 percent including divestments, the spokesman said. Analysts say this poor record is due to underinvestment in exploration from 1998 to 2004.
Shell said it continued to target 100 percent replacement over 2004-2008 but that most proved reserves would be added in the latter part of the period.
Analysts said this would be challenging. They are divided on whether Shell has turned around its upstream business after a reserves overbooking scandal in 2004 and massive cost overruns in 2005.
''(The target) would require the group becoming one of the best explorers among the integrated oil companies, rather than one of the worst,'' Hitchens added.
DISTRIBUTIONS DISAPPOINT
Shell also said it expected to return $5 billion to shareholders by repurchasing stock in 2006, in line with last year's share repurchases.
''They did have the flexibility to increase that, so I think some investors will not be impressed,'' Jason Kenney, head of oil and gas research at ING said.
Citigroup said in a research note that the failure to hike the buyback amount was ''likely to raise question marks over whether the company is planning acquisitions''.
Chief Executive Jeroen van der Veer reiterated to journalists on a conference call that he did not think that acquisitions above $10 billion were likely to create value for shareholders but suggested that smaller ones could.
Shell also kept its dividend steady at 0.23 euros per share.
''A higher dividend would have been nice,'' Jaap Barendregt at FBS Bankiers said.

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Last updated: 02-Feb-06 12:34 GMT