Royal Dutch Shell reported a more than 70 per cent fall in quarterly profit on Thursday, well below analyst estimates, blaming weak oil prices, poor refining profits and higher charges resulting from its US$54 billion acquisition of BG Group.
Shell’s current cost of supplies – its definition of net income – came to $1bn in the second quarter, compared with analyst expectations of $2.2bn and $3.8bn achieved the same time last year.
“Lower oil prices continue to be a significant challenge across the business, particularly in the upstream [business],” said the chief executive Ben van Beurden, who said last month he wants to turn Shell into the best oil company for investor returns.
“Downstream and integrated gas businesses contributed strongly to the results, alongside Shell’s self-help programme,”he said.
The downstream business includes refining, marketing and distribution, while upstream comprises exploration and production.
Shell’s second-quarter oil and gas production rose 28 per cent year on year, mainly thanks to the contribution of BG assets.Second-quarter production was 3.51 million barrels of oil equivalent a day, compared with analyst estimates for 3.63 million.
Referring to the results, Brendan Warn, a managing director at BMO Capital Markets in London, said: “This is a very big surprise from Shell.
“Things are not looking up in the third quarter either, with weakness in the industry’s refining environment and Shell’s oil production still under pressure.”
Rivals BP and Statoil also reported worse than expected second-quarter results this week mainly because analysts’ expectations on costs reductions had been too optimistic.
Shell’s London-listed A shares were 3.75 per cent lower at 1pm UAE time.
The company not only posted a loss in its oil production division but also saw lower income in most other segments including gas, petrochemical and oil refining.
Cash flow from operating activities for the second quarter 2016 was $2.3bn compared with $6.1bn for the same quarter last year, meaning it was not enough to even cover the dividend of $3.7bn.
The BG acquisition and the need to fund investment despite the low oil price environment pushed the company’s gearing to 28 per cent at the end of the quarter versus 12.7 per cent a year earlier. It saw its ratings cut this year.
Shell’s return on average capital employed was 2.5 per cent versus 7.6 per cent at the end of the same quarter in 2015, showing the deep impact from weak prices.
Shell left its cost-cutting targets unchanged on Thursday but previously trimmed its capital investment programme for 2016 to $29bn versus $47bn in 2014. It also wants to sell $30bn of assets out to 2018 and is cutting 12,500 jobs over the 2015-16 period.
The firm said divestments for the second quarter were $1bn, highlighting the struggle to find buyers in the current oil price environment.
For the second half of 2016, Shell warned its upstream earnings could be impacted by production losses in Nigeria. Shell has also deferred a final investment decision on its Lake Charles LNG plant in the United States.
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