Shell Has Biggest Loss in More Than a Decade on Price Slump

Is There More Cost-Cutting Ahead for Shell?
  • Company reports net loss after taking $7.9 billion charge
  • Third-quarter adjusted profit drops 70% to $1.8 billion

Royal Dutch Shell Plc reported its biggest net loss in at least 16 years after Europe’s largest energy group abandoned some projects and lowered its oil-price expectations, resulting in a charge of almost $8 billion.

The loss highlights the pain oil and gas companies are enduring as prices plunge, forcing them into the biggest belt-tightening in a generation. Eni SpA, the Italian oil group, also fell into a loss in the third quarter, while profit slumped at BP Plc and Total SA.

The oil price rout has wiped almost $500 billion since the end of last year from Bloomberg World Oil & Gas Index, which tracks energy stocks globally including Shell, ExxonMobil Inc and Chevron Corp.

Shell, which is buying BG Group Plc in the energy industry’s largest deal this year, reported a third-quarter net loss of $7.42 billion, compared with a profit of $4.46 billion a year earlier. Adjusted for one-time items and inventory changes, profit dropped 70 percent to $1.77 billion, The Hague-based Shell said Thursday in a statement. That missed the $2.92 billion average estimate of 17 analysts surveyed by Bloomberg.

Shell took a $4.61 billion charge resulting from the withdrawal from offshore drilling in Alaska and an oil-sands project in Canada, and $3.69 billion triggered by cuts to its outlook for oil and natural gas prices.

BG Deal

The loss increases the pressure on Europe’s biggest oil producer, which has cut jobs and reduced spending this year, as Chief Executive Officer Ben Van Beurden prepares the company for enduring low prices. Shell’s market value fell last month to the lowest this decade amid concerns that it may be overpaying for BG.

“While our cash flow and our operating performance in the quarter were strong, the headline numbers we’re reporting today include substantial charges,” Van Beurden, 57, said. “These charges reflect both a lower oil and gas price outlook and the firm steps we are taking to review and reduce Shell’s longer-term option set.”

Shell abandoned the construction of the 80,000 barrels a day Carmon Creek oil sands project in Alberta, Canada, after having already started building it, a sign of the painful decisions the company is taking. It also walked away from drilling in Alaska in September after $7 billion of spending ended with a well that failed to find hydrocarbons.

Cash Flow

While the scale of the write-offs surprised the market, Oswald Clint, oil analyst at Sanford C. Bernstein & Co., said investors should take comfort from the progress Shell had made to balance its cash flow with spending. The company was able to cover its capital investment and dividends with the money it earned from its operations plus asset sales, a target “the other majors are all pushing towards by 2017,” he said.

Shell, which is buying BG for more than $70 billion, said in July the deal will add to cash flow at $67 a barrel in 2016. Van Beurden insisted on Thursday the deal will benefit Shell, leading to higher dividends. The acquisition, to be completed early next year, will give Shell deep-water assets in Brazil, boost its position in Australian gas and expand its access to the U.S.’s emerging liquefied natural gas export industry. 

Shell’s B shares, the most widely traded, were 2.2 percent lower at 1,703.5 pence in London. The shares have dropped 24 percent this year.

Earnings Season

Eni SpA, Italy’s largest oil producer, also reported a net loss for the third quarter on Thursday. France’s Total SA posted a profit of $1.08 billion, 69 percent lower than a year earlier, as rising oil and gas production and growing profits from its refining operations helped to offset the slump in crude prices.

BG is due to announce earnings on Friday. Exxon Mobil Corp., the world’s biggest oil company by market value, and Chevron Corp. are also scheduled to release results the same day.

BP Plc’s third-quarter adjusted profit dropped 40 percent to $1.82 billion, yet it exceeded analysts’ forecasts by 44 percent on higher earnings from refining and natural gas trading. Statoil ASA’s adjusted net income fell 59 percent, missing estimates.

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