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Shell flags return to output growth as demand headwinds weigh

Highlights

Q3 output slips 1% to 3.56 million boe/d

Up to $9 billion of cash flow at risk in current market

Lower Q3 earnings beat forecasts by 23%

London — Shell expects to see its oil and gas production return to growth in the current quarter, after a hiatus in the third quarter, the oil major said Thursday, despite flagging macroeconomic threats to its key cash flow target.

Reporting stronger-than-expected third-quarter earnings, Shell said it expects its total upstream production to average 3.57 million-3.77 million b/d of oil equivalent in the fourth quarter.

The upside potential would mark a 6% increase from Q3 levels of 3.56 million boe/d but a 6% fall from Shell's Q4 2018 production of 3.79 million boe/d.

Europe's biggest oil major reported non-LNG linked upstream production slipped 2% year on year to 2.61 million boe/d during Q3, while its integrated gas business saw output grow 4% on the year to 957,000 boe/d. Combined, Shell's 3.56 million boe/d of production in the quarter was 1% lower on the year after asset sales, weaker performance in the Gulf of Mexico and Norway, and higher maintenance offset rising LNG output.

Shell's LNG sales in the third quarter rose 9% year on year to 18.90 million mt, and liquefaction volumes 9% to 8.95 million mt, a level expected to average 8.8 million-9.4 million mt in the fourth quarter.

Shell's adjusted Q3 earnings excluding one-time items fell 15% on the year to $4.8 billion, reflecting the lower production and weaker oil and gas prices. The result was 23% above consensus forecasts of $3.9 million for the period on a stronger LNG segment and trading earnings.

"This quarter we continued to deliver strong cash flow and earnings, despite sustained lower oil and gas prices, and chemicals margins," Shell's CEO Ben van Beurden said in a statement. "Our earnings reflect the resilience of our market-facing businesses and their ability to capitalize on market conditions, including very strong trading and optimization results this quarter."

DEMAND-SIDE CONCERNS

Despite the earnings beat, Shell said concerns over the health of the global economy are threatening to delay its plans to cut debt and boost shareholder returns.

If current oil prices of around $60/b continue into 2020, gas prices remain week and refining and chemical margins remain at current levels, Shell's cash flows could suffer to the tune of up to $9 billion next year, Shell's chief financial officer Jessica Uhl said a quarterly earnings call. (See story 1402 GMT).

"Softening demand in terms of the pace of oil growth is being experienced, and that's playing into sentiment in the oil and gas sector, and certainly, prices in the oil and gas sector," Uhl said.

Looking ahead, Uhl said Shell remains upbeat over its growth prospects, underpinned by further developing its gas-rich upstream portfolio and emerging power sector business.

"We have further opportunity to increase cash flow with the ramp-up of some sizable projects, so overall the fundamentals for the company are very strong," Uhl said.

Shell -- which does not issue oil and gas production targets -- said it was looking to grow its deepwater, shale and conventional oil and gas businesses. The company also wants to further develop its integrated gas, chemicals and fuels business.

Upstream growth in the short term will come from growing volumes from Shell's giant Prelude LNG project off Australia and its Appomattox field in the US Gulf which are both ramping up.

DOWNSTREAM WEAKNESS

Uhl said Shells expects its capital spending to end the year at the lower end of its guidance range but confirmed Shell's "flexible" $24-$29 billion capex range for 2020.

"The messaging that we're sending today is just signaling prudence that we can see some headwinds and that we want to manage that effectively," Uhl said.

Downstream, Shell posted a 51% jump in segment earnings supported by stronger refining, trading and marketing results. Refining and trading earnings of $448 million in the quarter reflected higher contributions from oil products trading, mainly fuel oil, partly offset by lower realized refining margins.

"[After] very low refining margins in Q2, [we had] a little bit of a bounce back in Q3. But again, in terms of the fundamentals of the sector and the outlook, it's quite possible that we will not get to mid-cycle margins in the refining sector," Uhl said.

In the fourth quarter, Shell said it expects refinery availability to be between 87%-92%, compared with 92% in the third quarter.

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

-- Edited by Jonathan Fox, jonathan.fox@spglobal.com