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Shell profits halve in ‘challenging’ economic conditions

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Via Financial Times

Lower oil and gas prices, weaker refining and chemicals margins and “challenging” economic conditions almost halved Royal Dutch Shell’s fourth-quarter profits and forced the energy major to slow the pace of its share buyback programme. 

The Anglo-Dutch group said net income adjusted for cost of supply — its preferred profit measure — fell to $2.9bn in the three months to December 31. This compared with $5.7bn in the same period in the previous year and was below analysts’ consensus forecasts of $3.2bn. Full-year earnings for 2019 were 23 per cent lower at $16.5bn.

The results sent the group’s shares down 3.3 per cent in early London trading to a near three-year low.

Shell said that it would slow investor payouts and planned to buy back $1bn of shares in the next quarter compared with $2.8bn in the fourth quarter of 2019.

In 2018, it launched a $25bn buyback programme, which it had promised after its $54bn acquisition of BG Group in 2016 with a plan to complete it by the end of 2020.

Stuart Joyner, analyst at Redburn, said: “It now looks extremely challenging to complete the buyback programme by the end of year as planned.”

While Shell has completed $15bn worth of share repurchases, chief executive Ben van Beurden said the pace of the buyback programme remained subject to economic conditions and debt reduction plans.

“It is essential to have a resilient balance sheet to manage the kind of volatility we are seeing at the moment,” he added.

Earnings at Shell’s gas business fell 47 per cent to $1.9bn after higher trading activity failed to offset lower prices. 

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The group’s exploration and production division reported a loss of $787m, compared with a profit of $1.6bn in the same quarter a year ago, because of lower oil prices, decommissioning costs and write-offs related to its business in Albania. 

Shell reported production of 2.8m barrels of oil equivalent a day in the fourth quarter, in line with the same period in the previous year.

The downstream refining and chemicals business reported earnings down 64 per cent to just over $1bn as weaker margins hit profits. Shell had warned in December about “materially lower” margins amid a weaker global economy. 

Cash flow from operations fell 53 per cent to $10.3bn in the fourth quarter compared with the year before. Free cash flow, which enables the company to pay for dividends and share buybacks, dropped from $16.7bn to $5.4bn over the period.

In recent years, Shell has cut costs and spending and sold $30bn of assets to shrink its debt. 

It had previously said it needed Brent crude prices to be above $65 a barrel in 2019 and $66 a barrel this year to meet its debt reduction targets and maintain the pace of share repurchases. Prices have largely been lower than this since June.

Shell announced impairments of $2.2bn, having previously flagged that charges “of up to $2.3bn” were expected in the fourth quarter. 

A number of oil and gas companies, including Chevron, BP, Repsol and Equinor, have written down billions of dollars’ worth of US shale assets in recent months. Rising US gas production, much of it a byproduct of the shale oil boom, has pushed prices to multi-decade lows.

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Shell executives said that if energy prices remained weak and refinery and chemicals margins stayed at current levels through 2020, cash flows could be hit by $7bn to $10bn.

The company said it was also monitoring the impact of the coronavirus outbreak on its business in China, the global economy and oil demand.

Capital expenditure in 2019 fell to just under $24bn — the lower end of the $24bn to $29bn range, which it expects to maintain this year.

It reported a fourth-quarter dividend of 47 cents a share and added that it would sell assets worth more than $10bn by the end of 2020.

Rival BP is scheduled to report earnings next week, as is France’s Total and Italy’s Eni.

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