Europe’s largest oil company Royal Dutch Shell plc (RDS-A - Analyst Report) reported robust third quarter earnings due to strong refining profitability, lower spending and contribution from certain high-margin projects.  

Hague-based Shell reported earnings per ADR (on a current cost of supplies basis) – excluding one-time items and gains or losses from inventories – of $1.85. This was well above the Zacks Consensus Estimate of $1.74 and the year-ago figure of $1.42.

Along with the earnings beat, Shell also named Charles Holliday – former chief executive of DuPont and a former chairman of Bank of America – its next chairman.

However, revenues were down 7.4% to $107.9 billion, reflecting sharply lower commodity prices and reduced production.

The Hague-based group is the second of the integrated supermajors to come out with third quarter results. On Tuesday, Shell’s continental rival BP plc (BP - Analyst Report) also beat earnings forecasts despite lower oil prices and rewarded investors with a dividend hike. U.S. biggies Exxon Mobil Corp. (XOM - Analyst Report) and Chevron Corp. (CVX - Analyst Report) are scheduled to report later this week.

Segmental Performance

Upstream: Upstream segment earnings during the quarter (excluding items) were $4.3 billion, a considerable rise from the $3.5 billion (adjusted) earned in the year-ago period.

This primarily reflects the impact of high-margin production, increase in dividend receipts from an LNG unit and lower exploration expenses. To some extent, these factors were negated by low prices and volumes, plus higher depreciation.

Shell’s upstream volumes averaged 2,790 thousand oil-equivalent barrels per day (MBOE/d), 4.8% lower than the year-ago period. Natural gas volumes fell 5.9%, while crude oil output was down 3.8%. Liquids contributed approximately 51% of Shell’s total volumes, while natural gas accounted for the rest.

Production during the quarter compared with the year-ago quarter included volumes from new field start-ups and the continued ramp-up of existing fields – particularly Majnoon in Iraq, Mars B in the Gulf of Mexico and BC-10 in Brazil – that boosted output by roughly 139 MBOE/d. However, this was more than offset by the effect of field declines and downtime.

Shell’s worldwide realized liquids prices were 8% below their year-earlier levels and natural gas realizations fell 7% from the third quarter of 2013. However, natural gas prices in North America jumped 17% from the last year’s level.

LNG equity sales volumes of 5.68 million tons were up 16% from the year-ago quarter, primarily on contribution from the acquisition of Spain-based Repsol S.A.’s LNG properties.

Downstream: In the Downstream segment, the Anglo-Dutch super-major recorded a profit (excluding items) of $1.8 billion as against $892 million in the year-ago period. The positive comparison reflects the impacts of higher refining margins, lower operating costs and strength in trading operations, somewhat offset by weak chemical contributions.  

Cash Flow

During the quarter under review, Shell generated cash flow from operations of $12.8 billion, returned $3.8 billion to shareholders through dividends/share buybacks and spent $8.5 billion on capital projects.

Balance Sheet

As of Sep 30, 2014, Shell had $19 billion in cash and $43 billion in debt (including short-term debt). Net debt-to-capitalization ratio stood at approximately 11.7%.

Zacks Rank

Royal Dutch Shell currently retains a Zacks Rank #5 (Strong Sell), implying that it is expected to significantly underperform in the broader U.S. equity market over the next one to three months.

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