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Shell to Raise Capital Spending, Dividend Despite Quarterly Loss

THE WALL STREET JOURNAL

JANUARY 30, 2009

LONDON — Amid deep gloom in the oil patch, Royal Dutch Shell PLC struck a discordantly bullish tone Thursday, saying it was raising dividends and capital spending this year despite a steep slide in the price of oil and a weak global economy.

[Shell reports earnings]
Associated Press: Rising costs are squeezing Shell’s refining and marketing segments.

That cheered investors, who have worried that some oil companies may be forced to cut their payout if oil prices stay low for months or years to come.

The move was in sharp contrast toConocoPhillips, which has been hit much harder by the global slowdown and said Wednesday it is cutting staff and slashing its capital budget.

On Thursday, Chevron Corp. said it would hold the line and spend $22.8 billion on capital projects in 2009, nearly identical to its spending last year. The California-based company has warned its profit would drop amid lower energy prices and refining margins. It reports earnings Friday.

Shell posted a net loss of $2.81 billion for the fourth quarter, largely as a result of lower oil prices. The company said overall net profit for 2008 was $26 billion. Fourth-quarter net profit on a current cost of supply basis — a measure that strips out changes in the value of inventories and is closely watched by investors — stood at $4.79 billion, down 28% from a year earlier. The results were largely in line with analysts’ expectations.

[shell oil capital expenditures]

With recession damping demand for energy, the price of oil has fallen by more than $100 a barrel since last summer, badly denting oil-company revenues. Yet industry costs have remained stubbornly high. Jeroen van der Veer, Shell’s chief executive, said that while crude was now back to the same level it was trading at five years ago, costs have doubled since then. He said conditions in the downstream part of the business — refining, marketing and petrochemicals — were as tough now as they were early in this decade, when crude was around $25 a barrel.

“That is a hard landing, and it puts a lot of pressure on the industry,” he said. Costs would come down — they already had for onshore drilling rigs and steel — but only after a lag of 12 to 18 months, he added.

Yet despite the tough environment, Shell would stick to a policy of paying “competitive and progressive dividends” and making “significant investments,” Mr. van der Veer said. He announced a dividend of 42 cents per share for the first quarter of 2009, up 5% from a year earlier, and said capital spending this year would rise to between $31 billion and $32 billion, compared with $30 billion in 2008.

[Van der Veer, Jeroen]

JEROEN VAN DER VEER

While Shell is continuing to spend, many smaller producers are slashing spending in the face of tumbling revenues. Occidental Petroleum Corp. on Thursday became the latest independent oil company to announce such a move, saying it would reduce its capital budget by 25%, to $3.5 billion in 2009. The company said it is canceling some drilling contracts, even when it needs to pay termination fees.

But even as they cut spending, smaller producers may enjoy an advantage over their giant counterparts in their ability to focus on smaller but still profitable projects. Occidental, the first large independent producer to report fourth-quarter earnings, said it earned $443 million in the fourth quarter, down 69% from a year earlier but a sharp contrast to the losses posted by Shell and Conoco for the quarter. Revenue for the quarter fell 27% to $4 billion.

“The coming months will be challenging for all companies in all industries,” Occidental Chief Executive Ray Irani told investors. But he said the company’s “low-risk, low-leverage profile” would allow it to remain strong.

Analysts welcomed Shell’s plan on its dividend and spending, which they described as a clear sign of the company’s confidence in the business. They noted that Shell’s strong balance sheet and healthy cash flow meant it was better placed than others to sustain its payout, even in a low oil-price environment. “[It] sends an encouraging sign of commitment to the market,” wrote Peter Hutton of NCB in a note to clients.

Although Shell said it would spend more this year than last, it has also postponed some decisions on major investments in the hope that costs may come down. These include Carmon Creek in Canada; Mars B, an oil project in the Gulf of Mexico; and the Pierce field in the U.K. Last year, it also announced it was putting off a decision to expand its Athabasca oil-sands development in northern Canada.

Peter Voser, Shell’s chief financial officer, said it cost $38 a barrel to produce oil in Canada’s oil sands, with energy costs accounting for around a fifth of that. With crude now trading at around $40 a barrel, that puts the economics of oil sands under intense pressure, and several oil sands operators have announced delays or cancellations of big projects.

—Russell Gold and Ben Casselman contributed to this article.Write to Guy Chazan at [email protected]

WALL STREET JOURNAL ARTICLE

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