Europe's largest oil company by market capitalization said it would hike investments to drive a 50 percent rise in cashflow and a 25 percent rise in oil and gas production in coming years.

However, weaker-than-expected results for the fourth quarter and full year, partly due to dismal industry-wide refining margins, and an anemic dividend hike, suggested investments were offering falling returns.

Hague-based Shell's London-listed A shares traded down 2.4 percent at 3:55 a.m. ET, lagging a 0.7 percent drop in the STOXX Europe 600 Oil and Gas index .SXEP.

Analysts at Investec said they were concerned about Shell's ever-rising investment expenditure, which they feared meant the company was spending "more for less."

"We expect to see material downgrades to the consensus FY2012/13 earnings numbers," they wrote in a research note.

Analysts at Citigroup said the company needed to convince investors it could invest money more profitably than rivals to justify the outperformance in its shares compared to rivals in the past 18 months.

"The new medium-term strategy unveiled today fails to offer that differentiated story," they said.

Shell said it was eyeing a return to strong production growth in the coming years, after nearly a decade. Apart from a 5 percent rise in 2010, the group's production has fallen every year since 2002.

"Oil & gas production should average some 4 million boe/d (barrels of oil equivalent per day) in 2017-18," the company said in a statement.

Production averaged 3.215 million boe/d in 2011, a 3 percent drop on 2010.

This growth will be generated by higher capital investment expenditure, which will rise to $32-$33 billion this year from $31.5 billion last year, Shell said.

Analysts had previously predicted that capex would fall, as Shell completed the big new projects such as the pearl gas-to-liquids plant in Qatar, which will push output higher.

The high capital being invested is one reason that Shell's return on capital employed failed to sparkle, at 15.9 percent, compared to levels above 20 percent a few years back when oil prices were considerably lower.

Similarly, in spite of a record average Brent crude price of $111/barrel in 2011, the full year current cost of supply (CCS) net income of $28.6 billion still lagged the earnings high Shell reported in 2008, of $31.4 billion.

FOURTH QUARTER DISAPPOINTS

Shell said its fourth quarter CCS net income was $6.46 billion, helped by one-off gains from the sale of assets.

Excluding one-offs, the result rose 18 percent to $4.85 billion, shy of an average forecast of $5.17 billion from a Reuters poll of nine analysts.

The miss was despite the fact analysts had recently cut back their forecasts in the light of weak trading statements from Shell's rivals.

CCS earnings strip out unrealized gains or losses related to changes in the value of inventories, and as such are comparable with net income under U.S. accounting rules.

The company also announced a weaker rise in its dividend than some analysts expected, adding just 1 cent to its first quarter dividend for 2012, to $0.43 per share.

(Additional reporting by Sarah Young; Editing by Helen Massy-Beresford)

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