Photographer: Andrey Rudakov/Bloomberg

Shell Profit Beats Analyst Estimates After Refining Gains

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Royal Dutch Shell Plc, the oil producer buying BG Group Plc for $70 billion, reported first-quarter profit that beat analysts’ estimates as refining and trading earnings countered part of the drop in crude prices.

Profit adjusted for one-time items and inventory changes fell 56 percent to $3.2 billion from a year earlier, beating the $2.5 billion average of 12 analysts’ estimates compiled by Bloomberg. Spending for this year will be cut by about $2 billion to $33 billion or less, The Hague-based Shell said Thursday in a statement.

Shell is cutting investment after oil’s slump over the past year forced producers to defer projects to strengthen their balance sheets. Trading and refining operations have cushioned the bear market for Shell and other European oil majors, including BP Plc, Total SA and Statoil ASA, which all reported better-than-expected quarterly earnings this week.

“Our results reflect the strength of our integrated business activities, against a backdrop of lower oil prices,” Shell Chief Executive Officer Ben Van Beurden said in the statement. “We continue to take steps to further improve competitive performance by redoubling our efforts to drive a sharper focus on the bottom line in Shell.”

Shell’s B shares, the most widely traded, rose 1.2 percent to 2,094.50 pence in London. The stock has declined 6.2 percent this year.

Average Brent crude prices fell 49 percent in the quarter from a year earlier to $55.13 a barrel. The benchmark has recovered this month, rising to about $65 a barrel as violence in the Middle East stoked supply concerns.

Price Outlook

Shell expects oil prices to rise to $90 a barrel by 2018, justifying the 50 percent premium it bid to buy BG, according to an April 8 statement.

The Anglo-Dutch company together with BP and France’s Total are the biggest oil traders, handling enough fuel every day to meet the needs of Japan, India, Germany, France, Italy, Spain and the Netherlands. The bear market has allowed them to generate higher returns by storing cheap oil to sell at a profit later and using lower prices to make more bets with the same capital.

The BG acquisition, to be completed by early next year, will give Shell deep-water assets in Brazil, consolidate its position in Australia’s gas industry and allow greater participation in the U.S.’s emerging liquefied natural gas exports business.

Van Beurden accelerated asset sales and reduced spending even before oil started to tumble last June. Shell axed a $6.5 billion petrochemicals plant in Qatar and said in January it will cut $15 billion of investments over the next three years and curtail exploration.

Downstream Earnings

The company sold $2.2 billion of assets in the first quarter and capital investment was $6.8 billion.

Shell’s earnings from its downstream business, including refining, adjusted for one-time items and inventory changes increased 68 percent to $2.6 billion. The company expects its refining capacity and marketing volumes to fall in the second quarter compared with a year earlier after selling assets in Australia and Italy.

“The refining earnings were better than everyone expected,” said Quirijn Mulder, an oil sector analyst with ING Bank NV in Amsterdam. “The flip side of that is that refining margins can fall anytime because it depends so much on supply and demand.”

Eni SpA, Italy’s biggest oil company, expects the surge in European refining to end this year. Total said this week higher margins can’t be sustained because the region still has surplus processing capacity.

Shell’s production declined 2 percent to 3.2 million barrels of oil equivalent from a year earlier. Second-quarter earnings will be cut after 160,000 barrels a day of output was divested, the company said.

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