Shell posts record European profit but doubts linger

By Tom Bergin

LONDON (Reuters) - Royal Dutch Shell <RDSa.L> posted a record European company profit of $27.6 billion for 2007, but lower production and indications of reserves suggest earnings growth will rely on oil price rises for some years to come.

The world's second-largest non-government controlled oil company by market value said on Thursday its fourth-quarter current cost of supply (CCS) net income rose 11 percent to $6.7 billion. Excluding one-off items, the result was in the lower end of analysts' range of forecasts.

CCS earnings strip out unrealized gains or losses from changes in the value of fuel inventories, and the figure is comparable to U.S. oil companies' net income.

The rise in Shell's profits was driven by its core upstream oil and gas production division.

Following a trend seen at Shell and peers such as BP Plc <BP.L> in recent years, the Anglo-Dutch company relied on a big jump in oil prices to make up for a 6 percent drop in oil and gas production and a rise of over 10 percent in costs.

"(The results) will do little to assuage concerns that large integrateds are unable to capture record prices," Peter Hutton at NCB brokers said in a note to clients.

U.S. crude prices averaged over $90 per barrel in the final quarter of 2007, before hitting a record above $100 in January.

Shell rowed back from targets to expand production in coming years, with Chief Financial Officer Peter Voser refusing to restate a plan for 1-2 percent growth to 2010 and saying output was likely to fall "slightly" in 2008.

Shell will have to pay more to achieve even this modest aim, with capital expenditure for 2008 now seen by the company growing around 7 percent to $28-29 billion after a 15 percent rise in 2007.

Although analysts had expected a capex rise, James Neale, oil analyst at Citgroup, said investors may wonder what they are getting in return for the higher spending.

Shell also indicated 2007 oil and gas reserve additions may disappoint, saying at least 1 billion barrels of resources were added in the year, compared with well over 2 billion in 2006.

Shell's London-listed "A" shares traded down 1.7 percent at 1758 pence at 1120 GMT, against a 1 percent drop in the DJ Stoxx European oil and gas sector index <.SXEP>.

RECOVERY DELAYED

Shell has been struggling to rebuild investor confidence since admitting in 2004 that it had overstated its reserves by around a third.

A new management team was brought in and in the past two years the group has posted a strong financial performance, helped by record oil prices.

However, the oil price environment made an operational turnaround tougher, shifting the balance of power away from international oil companies such as Shell and Exxon Mobil Corp <XOM.N> to the governments of resource-holding nations.

Increasingly these governments prefer to have their state oil companies develop reserves, making it hard for the western majors to grow output and reserves.

"We think that Royal Dutch Shell's re-rating is a long-term story," Alexandre Weinberg, analyst at Petercam, said.

A resurgence in the refining business also helped Shell and its peers in recent years but margins deteriorated sharply in the fourth quarter, as refiners found it hard to pass high crude prices onto motorists.

Analysts fear this business may be reverting to the low margins it endured for much of the 20 years to 2004 and may not in future be able to compensate for any upstream weakness.

Analysts at JP Morgan said earlier this month that if oil prices fell below $85/barrel, the integrated major oil companies' run of record earnings might come to an end.

Excluding a non-operating gain of $963 million largely from field sales, Shell's CCS net income was $5.74 billion, compared with an average forecast of $6.1 billion in a Reuters poll of nine analysts.

(Additional reporting by Mark Potter; Editing by Quentin Bryar)