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Highlights

Q4 production little changed at 3.79 mil boe/d

SEC reserves replacement just 53% for 2018

Adjusted Q4 earnings up 32% on year

London — Anglo-Dutch oil major Shell reported flat production but higher earnings for the fourth quarter of 2018 on Thursday, as higher oil and gas prices and an improved downstream performance fueled strong cash flow growth.

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Europe's largest oil company, the first major to report Q4 earnings, said total production during the period increased 1% on the year to 3.79 million b/d of oil equivalent, mainly driven by new field startups and ramp-ups.

Excluding asset sales and portfolio impacts, Shell said its production was 5% higher in the quarter.

Full-year 2018 oil and gas production was also little changed at 3.67 million boe/d, with output from new projects offsetting the impact of divestments and field declines.

The company, which does not give production guidance, started gas flows to its giant Prelude floating LNG facility offshore Australia in December and plans to launch production from Appomattox in the Gulf of Mexico this year.

Combined, project startups this year are expected to pump some 150,000 boe/d when fully operational, Shell's CEO Ben van Beurden said, a level which is "more than enough to offset declines elsewhere."

In the current quarter, Shell said it expects upstream production to be 10,000-50,000 boe/d lower on the year, mainly due to divestments and field declines.

It said its integrated gas production is expected to be 140,000-170,000 boe/d lower, mainly due to divestments and the transfer of some activities into the main upstream segment.

STRONG CASH FLOW

On a current cost of supplies basis, Shell reported Q4 2018 earnings, excluding one-time items, of $5.69 billion, up 32% from $4.3 billion a year earlier.

The result was ahead of market expectations, beating consensus forecasts by about 7%. Cash flow from operating activities in Q4 more than doubled to $22 billion, helped by positive working capital movements of $9.1 billion.

"We will continue with a strong delivery focus in 2019, with a disciplined approach to capital investment and growing both our cash flow and returns. Our strategy to deliver a world-class investment case is working," van Beurden said in a statement.

Despite surging cash flows as a result of lower costs and higher prices, van Beurden said Shell will continue to invest for future growth "in a very disciplined manner." He said the company is maintaining a capex program of $25-30 billion for 2019 and confirmed the company is on track for its $25-30 billion free cash flow targets.

RESERVES REPLACEMENT SLUMP

Shell said it only replaced about half of its production with new proven reserves last year, mainly due to the writedown of reserves at its troubled Groningen gas field off the Netherlands.

The writedown of reserves from Shell's 50% stake in the giant field dragged its three-year average reserves replacement ratio into the red.

Shell's reserves replacement ratio on an SEC basis is expected to end the year at 53% and average 96% over the last three years, it said. Excluding the impact of acquisitions and divestments, it said its RRR is expected to be 66% for the year.

Stymied by tougher access to new resources and the impact of the 2014 oil price slump, oil majors have struggled to replace all their production with reserves over recent years.

In the last decade, the oil majors' combined proven oil and gas reserves have slipped 3.5%, reducing the sector's average reserve life as rising production eats into remaining reserves.

Despite Shell's slipping reserves life, the company said its upstream asset deals are aimed at shedding lower-margin projects to replace volumes with higher-margin developments in countries such as Brazil and the US.

"Not all barrels are created equally and we will not chase production volumes on reserves but will continue to focus on cash generation and returns," CFO Jessica Uhl said, pointing to Shell's exit from Iraq's "low value" Majnoon oil field in 2018.

ASSET 'HIGH-GRADING'

Shell said its $30 billion divestment program is now complete, allowing it to trim its high debt levels further following the $54 billion acquisition of the UK's BG Group in 2016.

Gearing at the end of 2018 was 20.3%, compared with 25% at the end of Q4 2017 -- a $14.5 billion reduction in net debt.

Van Beurden said the company plans to continue "high-grading" its upstream portfolio, with planned ongoing divestments of more than $5 billion in both 2019 and 2020.

In the downstream division, Shell reported Q4 adjusted operating earnings of $2.13 billion, up 53% on the year, supported by a higher contribution from crude oil trading and higher refining and marketing margins.

Refinery availability increased to 94% compared with 89% in Q4 2017, mainly due to lower downtime. Shell's refinery crude runs rose 5% year on year to average 2.72 million b/d globally in the quarter.

-- Robert Perkins, robert.perkins@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com

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