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Royal Dutch Shell plc (ADR) Earnings Drop as Oil Rout Continues

Royal Dutch Shell plc (ADR) (NYSE:RDS.A[1]), one of the largest European oil majors, expects its profits to fall deeply in the fourth quarter as crude oil prices fell to record lows during the reporting period.

Profits Plunge

In a statement issued on Wednesday, Shell expects earnings of $1.6 1.9 billion for the fourth quarter, adjusting for one-time items and inventory changes. It marks a sharp decline from the $3.26 billion Shell earned during the same quarter in 2014. The midpoint of Shell s preliminary earnings figure is marginally lower than analysts consensus estimate of $1.78 billion. Finalized results are scheduled to release on February 4, Shell confirmed. The expected drop in earnings can be attributed to the prolonged decline in crude oil prices. In the past three months, crude oil prices averaged around $45 per barrel, which is substantially lower than pre-slump price levels.

BG Deal

The plunge in profits comes ahead of Shell s multi-billion deal to acquire BG Group a UK-based oil giant with huge LNG and deepwater reserves. Shell s proposed takeover was initially valued at $70 billion, but then it was revised down to $50 billion. The deal attracted broad criticism as it seems to be a bet on oil to recover. Since the deal s announcement, oil prices have fallen over 50%. Investors seem concerned that Shell may overpay for BG s oil assets. A continued weakness in oil price further validates their concerns in the present scenario.

Shell CEO, Ben van Beurden, defended the deal and called it a bold, strategic move. The completion of the BG transaction, which we are expecting in a matter of weeks, will mark the start of a new chapter in Shell, to rejuvenate the company and improve shareholder returns, Mr. van Beurden added.

Focus on Costs

In a tough market environment, Shell has been focused on cost cutting initiatives and synergies. During 2015, operating costs fell about $4 billion, Shell said. It expects costs to fall another $3 billion in 2016.

I’m pleased with Shell’s operating performance in 2015, and the momentum in the company to reduce costs and to improve competitiveness, said Mr. van Beurden. It recently slashed its capital spending budget to convince shareholders to support the deal on January 27, when it would be put to a final shareholder vote. The oil giant now expects capital expenditure at $29 billion for 2015, down 8% from 2014 levels.

Flexibility for further reductions is available and will be utilized should conditions warrant that, Shell said. Shell has been largely selective to opt for new investment opportunities, since oil prices crashed soon after it made a multi-billion dollar bet on a recovery. Additionally, it has accelerated its asset sales due to the depressed prices.

For 2014 2015, Shell sold over $20 billion in assets, compared with a target of $15 billion, set two years ago. From 2016 2018, Shell expects to raise another $30 billion from asset sales, only if the BG deal goes through, successfully.

Strong Balance Sheet and Dividends

Cost improvements, synergies from BG deal, additional asset sales, and reduced capital spending, have all contributed to position Shell for the low pricing environment.

As a result of the above actions, we have retained a strong balance sheet position at around 14% gearing, Shell said. At the end of third quarter, Shell s gearing stood at 12.7%.

Shell also reminded investors of its commitment to return cash to shareholders. The company expects 2015 dividends to be $12 billion in total, or $1.88 per share. It further assured investors a dividend of at least $1.88 per share in 2016 as well.


  1. ^ NYSE:RDS.A (www.bidnessetc.com)

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