Shell beats consensus but earnings hit by downstream pressures - UPDATE

- Q1 earnings down 43.8 per cent- Underlying earnings down 3.0 per cent- Impairments made to Downstream due to market 'pressures'- Dividend up 4 per cent to 47 cents- Upstream production 3.2m boepdFirst quarter earnings were down three per cent at Royal Dutch Shell, but well ahead of consensus. If excluding large impairments on refineries in Asia and Europe which reflect 'substantial' pressures on its Downstream business, earnings were $7.3bn versus the previous $7.5bn. Downstream earnings were hit by lower industry refining margins and trading results and higher costs also affecting Upstream.Including impairments, earnings fell 43.8% on a current cost of supply (CCS) basis to $4.5bn, down from $8.0bn in the first quarter of 2013. The impairments of $2.9bn in Downstream reflected the company's "updated views on the outlook for refining margins", said Chief Executive Officer Ben van Beurden. "There are substantial pressures on the industry from excess capacity, changing product demand, and new oil supplies from liquids-rich shales." However, he added that while the results reflected "more robust levels of profitability", as we saw in 2013, "we are in an industry where high volatility remains, both in the macro-environment and in our quarterly results".The refining-related impairments, equivalent to 14% of Shell's refinery asset base, reflected what the company said was its latest insight into margins based on feedstock supply and product demand outlook. Nevertheless, cashflow from operating activities for the quarter was $14.0bn, or £13.1bn if movements in working capital are excluded.The board proposed a 4% quarterly dividend increase to $0.47 per A and B share. Van Beurden said Shell was looking to continue to balance growth and returns, by focusing on three key priorities: "better financial performance, enhanced capital efficiency, including more selectivity on project choices and $15bn of divestments in 2014-15, and continuing strong project delivery".The period saw profitable production from the deep-water Gulf of Mexico and Iraq, together with new liquid natural gas (LNG) from the acquisition of Spanish oil major Repsol's gas portfolio.The group has shelled out $10.7bn of capital investment so far in 2014, including $2.0bn on the LNG business. Net capital investment was $10.1bn.In Upstream, production was 3.2m barrels of oil equivalent per day and upstream earnings were marginally higher due to stronger Integrated Gas results as well as higher gas realisations and gas trading results, though this was offset by the impact of exploration well write-offs, and higher costs and depreciation."We are making hard choices on Shell's assets and options, to improve capital efficiency, in both Upstream and Downstream. The divestments underway in Downstream in four countries are part of Shell's drive to improve our competitive position," he said. Shell has agreed to sell businesses in Australia, Italy and Denmark and is considering the sale of certain of marketing assets in Norway.Van Bueurden said: "Downstream has the potential to average 10-12% return on average capital employed, more than double current levels, and to deliver around $10 billion of annual cash flow. I am determined to improve our performance in this business."Investec analysts said: "The cold US winter and global LNG trading were key, but unquantified, drivers and the addition of Repsol's LNG assets was timely. We note that Q1 is usually a strong quarter for Shell, including seasonally lower costs. Current full year consensus is $22bn so, while this is a good start, we would caution against 'over-extrapolation'."OH