Photographer: Andrey Rudakov/Bloomberg

Shell Profit Drops 44%, Matching Estimates, as Crude Tumbles

  • Shares rise most since 2009 are global stocks rebound
  • BG now becomes important for Shell's growth, BMO's Warn says

Royal Dutch Shell Plc, which is on the brink of completing the oil industry’s largest deal in a decade, reported fourth-quarter profit that matched analyst estimates. The shares rose the most in almost seven years amid a rebound in global stocks and a selloff in the dollar.

Profit adjusted for one-time items and inventory changes shrank 44 percent to $1.8 billion, near the midpoint of the preliminary $1.6 billion-to-$1.9 billion range it gave last month, Shell said Thursday.

Crude’s collapse has slashed earnings for oil companies from Exxon Mobil Corp. to BP Plc, leaving them struggling to strike a balance between investing for growth and making shareholder payouts. The Hague-based Shell is betting its $50 billion acquisition of BG Group Plc will help it maintain dividends and increase oil and gas production at a time when cash flow is shrinking. 

“BG now becomes important for Shell because it helps them grow and high-grade their assets,” Brendan Warn, a London-based analyst at BMO Capital Markets, said by phone. “It gives Shell the opportunity to divest their high-cost assets and focus on BG’s high-margin projects.”

Oil’s Collapse

Shell’s shareholders last month approved its plan to buy BG, which has oil fields in Brazil and natural-gas assets from Australia to Kazakhstan, despite the 40 percent tumble in crude prices since the deal was announced. The average price of benchmark Brent in the fourth quarter was $44.69 a barrel, the lowest since 2004. Average prices have lost more than $10 this quarter, making it harder for Shell to deliver on its promises to investors.

The company’s B shares, the class of stock used in the BG deal, advanced as much as 6.8 percent in London, the biggest intraday gain since 2009. The stock traded up 6.6 percent at 1,533 pence as of 11:51 a.m. local time, paring its decline this year to 0.7 percent. The 61-member Bloomberg World Oil & Gas Index has dropped 5.4 percent in the period. 

The slump in crude has hit earnings of companies around the world. Statoil ASA, Norway’s biggest oil company, said on Thursday fourth-quarter adjusted profit fell 63 percent and missed analysts’ estimates. BP’s dropped 91 percent and Exxon’s 58 percent. Chevron Corp. reported its first loss since 2002.

The acquisition of BG is due to become effective Feb. 15. Its completion “marks the start of a new chapter in Shell, rejuvenating the company and improving shareholder returns,” Chief Executive Officer Ben Van Beurden said in a statement. “Shell will take further impactful decisions to manage through the oil-price downturn, should conditions warrant that.”

Asset Sales

The company plans to sell $30 billion of assets after the acquisition is complete. As oil prices remain low, that may be difficult because the slump has squeezed the balance sheets of potential buyers. Most of this year’s disposals are likely to be in the second half of the year, Van Beurden said on a conference call on Thursday. The company divested $5.5 billion of assets in 2015.

Shell’s return on average capital employed dropped to 1.9 percent at the end of last year compared with 7.1 percent in 2014, according to the statement. That’s the narrowest margin since the late 1990s and is likely to increase as new projects, including liquefied natural gas in Australia, come on line, Chief Financial Officer Simon Henry said.

The company’s cash expenditure, including the dividend payout, surpassed its earnings from operations and asset sales by $2 billion last year, Henry said. That put Shell’s break-even point at “just under $60” a barrel, he said. BP reiterated this week it would be able to balance its books if oil returns to that level in 2017.

Cutting Costs

To ride out the downturn, Shell reduced operating costs by $4 billion, or about 10 percent, last year, and plans to cut them by a further $3 billion in 2016. It expects $33 billion of capital spending this year following the combination with BG, lower than a previous estimate of $35 billion.

Shell, which exited a gas field in Abu Dhabi and stopped an oil-sands project in Canada last year, is postponing final investment decisions on LNG Canada and Bonga South West in deep water Nigeria because of lower energy prices, Van Beurden said. LNG Canada is a venture between Shell, PetroChina Co., Korea Gas Corp. and Mitsubishi Corp. The LNG export facility, planned to be built in Kitimat, British Columbia, won government approval to start construction last month.

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