Bloomberg.com: Showa Shell 2nd-Half Net Rises 26% on Oil Price Gains

Feb. 17 (Bloomberg) -- Showa Shell Sekiyu K.K., a Japanese refiner half-owned by Royal Dutch/Shell Group, reported a 26 percent rise in second-half profit as a surge in crude oil prices increased the value of its inventory and demand for gasoline and fuel oil rose.

Group net income was 11.7 billion yen ($111 million) in the six months ended Dec. 31, compared with 9.3 billion yen a year ago. Bloomberg calculated second-half earnings by subtracting first-half numbers from full-year figures the company released to the Tokyo Stock Exchange. Showa Shell said it expects group net income to fall 14 percent to 18 billion yen this year.

Showa Shell, like most other Japanese refiners, gained from a recovery in gasoline demand as Japan's economy rebounded after a decade of intermittent recessions. The company's profit was buoyed by higher sales of fuel oil to Tokyo Electric Power Co., Asia's biggest power utility, which closed all its nuclear reactors by last April for safety checks.

``Sales of premium gasoline were very good last year,'' said Hirofumi Kawachi, a senior analyst at Mizuho Investors Securities. ``Moreover, sales of kerosene were much better than the market expected. Petrochemical prices are also going up.''

The second-half profit was 34 percent higher than the company's implied forecast. Showa Shell's full-year sales were 6.6 percent higher than a year ago.

Shares of Showa Shell rose 1 yen to 829. The earnings were announced after the close of trading on the Tokyo Stock Exchange. The shares were the second-worst performing among refiners in Japan's Topix Oil & Coal Index last year, gaining 5.7 percent. They've lost 4.8 percent of their value this year, compared with a 1.1 percent rise in Japan's benchmark Topix stock index.

Yen

The yen strengthened an average 7.5 percent against the dollar in 2003, compared with 2002, helping to lower the cost of crude oil imports for Japan's refiners. Showa Shell purchases as much as half of its crude oil from its parent, Royal Dutch/Shell Group.

Higher crude oil prices also boosted the value of Showa Shell's stockpiles.

Dubai crude oil prices, a benchmark for Asian refiners, rose 12 percent last year to an average $26.70 per barrel in part because of disruptions to supplies from Iraq during and after the U.S.-led war to oust Saddam Hussein.

In the full year ended Dec. 31, group net income rose 13 percent to 21 billion yen ($198.3 million), from 18.7 billion yen in 2002, the company said in the statement. The refiner had forecast group net income of 18 billion yen.

Showa Shell was hurt by a slowdown in cost-cutting efforts while its rivals such as Nippon Oil Corp. and Idemitsu Kosan Co. step up efforts to reduce operating costs by sharing procurement and marketing functions.

Showa Shell, which cut costs by 111 billion yen between 1996 and 2002 by closing refineries and gasoline stations, aimed to cut operating expenses by 5 billion yen last year. Increased competition among Japanese refiners also restricted growth in Showa Shell's profit margins on sales of fuel products.

Showa Shell countered with sales of more-profitable, higher- priced Shell Pura gasoline through additional gas stations. The company rolled out the product in Niigata Prefecture in northwestern Japan last year.

The gasoline contains less than 10 parts per million of sulfur compared with 35 parts per million in regular gasoline, reducing noxious exhaust emissions.

Still, an expected drop in crude oil prices this year may cut the value of its oil inventories and reduce group net income by 14 percent this year, Roy Waight, Showa Shell's vice president told reporters. Excluding the impact of lower crude oil prices on inventories, the company's operating profit will be better than last year, he said.

The company also expects a 4.5 percent decline in sales this year.

To contact the reporter on this story:

Rajat Bhattacharya in Tokyo at rbhattachary@bloomberg.net.

To contact the editor of this story:

Reinie Booysen at rbooysen@bloomberg.net.

Last Updated: February 17, 2004 04:13 EST

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