Shell disappoints market with 72% fall in quarterly profit

Royal Dutch Shell has disappointed investors with a 72 per cent fall in quarterly profit that it blamed on weak oil prices and costs related to its $54 billion takeover of BG Group, showing how much strain it faces after the bumper deal.

Shell missed analysts’ estimates for second-quarter current cost of supplies – its definition of net income – by $1.1 billion mainly because they had expected a better performance at the upstream division, which lost $1.3 billion, compared with a $469 million deficit last year.

“Lower oil prices continue to be a significant challenge across the business, particularly in the upstream [sector],” said chief executive Ben van Beurden, who said last month he wanted Shell to be the best oil company for investor returns.

Shell also spent more than expected on corporate expenses, with some $250 million going on redundancy and restructuring charges following the BG deal.

The oil major is laying off some 12,500 workers over 2015-16.

Shell rivals BP and Statoil also reported worse-than-expected second-quarter results this week mainly because analysts' expectations on cost reductions had been too optimistic.

Despite its poor performance, Shell left its main capital investment and disposal targets as well as its prized dividend unchanged.

Cash flow from operating activities for the second quarter of 2016 was $2.3 billion compared with $6.1 billion for the same quarter last year, meaning it was not enough to cover the quarterly dividend of $3.7 billion.

“We do expect the release to have negative implications for the stock short-term, but ultimately a rebalancing of the cash equation is happening and despite the seasonality in earnings Shell is, in our view, heading in the right direction,” analysts at Barclays wrote.

Shell is undergoing a $30 billion asset divestment programme and expects to sell $6-8 billion this year.

The oil major is also on track to meet its drastically reduced annual capital investment programme of $29 billion.

On Thursday, Shell said it would delay a final investment decision for its Lake Charles liquefied natural gas (LNG) project in the United States. It was previously planned for this year.

This follows Shell’s decision in February to push back an investment decision on its Canadian LNG project.

Shell’s BG takeover has added huge costs in the short term but the second-quarter performance shows its impact on Shell’s portfolio.

Shell’s production in Nigeria will fall by around 35,000 barrels per day in the second half of the year due to “sabotage incidents” and scheduled repairs, it said. It warned earnings could be impacted if the situation deteriorates.

Reuters