Shell suffers 80% slide in profits

Royal Dutch Shell suffered an 80 per cent slide in profits last year, as a sustained slump in oil prices battered revenues across the energy industry.

The Anglo-Dutch company, the latest of the US and European majors to detail the effects of the crude price collapse on earnings, said full-year profits, on a current cost of supplies basis fell from $19 billion a year ago to $3.8 billion.

It said underlying earnings for the fourth quarter excluding identified items, analysts’ preferred measure, declined to $1.8 billion from $3.3 billion for the same period the previous year, a drop of 44 per cent and in line with guidance provided by the group two weeks ago.

Shell’s £35 billion bid for rival BG Group, which has been approved by both companies’ shareholders, is expected to become effective on February 15th and Thursday’s financial results reiterated the group’s efforts to slash costs.

Following a 70 per cent drop in the price of Brent crude to just $35 a barrel, it plans to slash capital investment this year, dispose of $30 billion of assets by 2018 and cut 10,000 jobs, including reductions as a result of the BG deal.

Shell said it has deferred or cancelled several high profile projects, postponing final investment decisions on Canadian liquefied natural gas and a deepwater oil project in Nigeria, both high cost areas hit hard by the slump.

Fourth quarter production slipped to 3 million barrels of oil equivalent a day from 3.2 million boe/d a year ago, due to declining natural gas output.

The upstream, or exploration and production business, fell to a $5.7 billion loss last year, versus a profit of $15.8 billion 2014, reflecting in large part one off charges from writing down US shale gas assets, pulling out of Alaska and a Canadian oil sands project. However, the downstream, or refining arm, put in a resilient performance, trebling annual profits to $10.2 billion.

The majors’ refining businesses act as a hedge against falling oil prices because oil is a feedstock for more valuable products including gasoline.

“The completion of the BG transaction, which we are expecting in a matter of weeks, marks the start of a new chapter in Shell, rejuvenating the company, and improving shareholder returns,” said Ben van Beurden, chief executive.

“We are making substantial changes in the company, reorganising our upstream, and reducing costs and capital investment, as we refocus Shell, and respond to lower oil prices,” he said.

“As we have previously indicated, this will include a reduction of some 10,000 staff and direct contractor positions in 2015-16 across both companies.”

Shell’s share price was up by 5.4 per cent in early morning trading. Mr van Beurden said that the group had exited the Bab sour gas project in Abu Dhabi, and postponed approval of its Bonga South West project in Nigeria. There would be “further reductions” in operating costs and capital spending this year after cuts in 2015 of $12.5 billion.

The cost-cutting, as with other European and US oil groups, is designed to shore up cash flow and keep Shell’s promise to shareholders to at least maintain last year’s dividend – of $1.88 per share – in 2016.

Oil majors’ shares have long been valued for their reliable income streams: Shell has not cut its dividend for many decades. But exchange traded dividend futures have priced in about a 17 per cent cut to Shell’s payout this year, and reductions of more than 40 per cent, for 2017 and 2018.

The increased market concern comes as senior oil executives prepare for a prolonged period of lower prices after Saudi Arabia-led Opec’s refusal to cut output in the face of a US supply glut and weaker Chinese demand.

Shell says the BG takeover deal will work with Brent in the “mid-$60s” – but even that will require a substantial recovery in crude.

Mr van Beurden sought to allay fears over future payouts, stressing the group’s “strong balance sheet” and gearing – or ratio of net debt to equity – of 14 per cent, relatively low by industry standards. The full-year dividend was maintained at $1.88 a share and would be the same this year.

– Copyright The Financial Times Limited 2016