So you thought that falling oil prices was going to make companies like Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B) have a lousy quarter, but that wasn't the case. Even with oil prices slipping to around $80 a barrel, Shell was able to produce quarterly earnings on a current cost of supply basis by 30% and beat just about every estimate out there. Let's take a look at how the company was able to produce better than expected results and whether this is a signal to buy the company or not.

Growth by shrinking. Wait, what?

The most recent earnings from Shell are a bit of a head-scratcher when you look at them initially. Yes, the company did increase its earnings on a current cost of supply basis by about 30% year-over-year, but it somehow did that while production, revenue, and prices for both oil and gas declined. 

The reason that it actually was able to still perform well despite those indicators seeming to suggest otherwise is that the company was able to significantly slash its costs and replace several lower margin parts of the production portfolio with higher margin projects coming online. An example of this is that in the quarter the company unloaded its natural gas producing assets in the Pinedale field in Wyoming and the Haynesville shale in Louisiana. In exchange, the company brought on production at its Gumusut-Kakap deepwater platform in Malaysia, and its total volumes of LNG sold increased by 16%.

This outcome is pretty much the exact playbook that CEO Ben van Beurden had drawn up at the beginning of the year. The company would slash its capital expenditure budget to focus on only the highest return projects in the portfolio, unload its less profitable assets through sales and spinoffs, and use the excess cash to boost shareholder returns through dividends and buybacks. While earnings have impressed, the biggest indicator that this program is going according to plan is the company's ability to generate cash from operations. In the first nine months of this year, cash from operations excluding working capital adjustments is $35.1 billion, while cash from operations in all of 2013 was just $37.4 billion. 

What a Fool believes

Lots of analysts looking on a quarterly or yearly basis will probably point out that Shell and the rest of the integrated major oil companies out there will suffer with oil prices hitting the levels they are at. That's true to a certain degree, but that is the nature of the beast when it comes to investing in oil and gas and it shouldn't really deter long-term investors.

The concern that investors should look to going forward with this company is how long it can operate at this basement level capital spending. Eventually, declining production will start to cut into cash flow and earnings, and it will need to start spending more money to either maintain production levels at some of its more profitable ventures or look to expand production through some new projects that will likely have a high price tag. 

This, more than anything, is the biggest reason that an investor might want to look at one of Shell's peers in the long run. Many other companies in this space are also doing a very commendable job of increasing cash flow, but at the same time their growth prospects look a little more robust. While today is probably one of the better times in recent history to buy shares of Royal Dutch Shell, there appear to be better opportunities in the Big Oil space elsewhere.