30th Jul 2015 11:37
LONDON (Alliance News) - Shares in Royal Dutch Shell PLC and its merger partner BG Group PLC lead the FTSE 100 on Thursday after Shell said it will slash further costs and jobs as it reported a USD1.7 billion drop in earnings in the second quarter of 2015.
Shell A shares were up 4.0% to 1,835.50 pence per share, while B shares also were up 4.0%, at 1,848.00p. BG Group shares were up 4.1% at 1,083.00p.
Shell said around 6,500 jobs will be cut as a result of its cost reductions, but also reaffirmed its commitment to its dividend alongside a share buyback. Shell also has sold a significant stake in its downstream refinery business in Japan.
Shell reported current cost of supply earnings of USD3.4 billion in the second quarter of 2015, down from USD5.1 billion a year before, as revenue fell to USD73.95 billion from USD115.27 billion after being hit by lower oil prices.
Earnings before exceptional items came in at USD3.8 billion in the second quarter, down from USD6.1 billion a year before, whilst pretax profit followed suit and fell to USD5.57 billion from USD9.12 billion.
Those exceptional items totalled USD474 million in the quarter, down from USD979 million a year earlier. The items comprised of USD263 million to its upstream division and USD215 million to downstream asset impairments
Shell said its downstream segment contributed "strong" earnings in the quarter but said the upstream unit continued to be hit by lower oil prices and a fall in production.
Production fell 11% year-on-year in the second quarter to 2.73 million barrels of oil equivalent per day, whilst liquefied natural gas sales were down 9%. However, sales of oil products were up 1% year-on-year.
On a like-for-like basis, production was down 3% year-on-year in the second quarter.
Cashflow from operating activities came in at USD6.1 billion in the quarter, down from USD8.6 billion a year earlier.
In an earlier statement Thursday, Shell said its plans to pay a full-year dividend of USD1.88 per share in 2015 and at least that for 2016 remains unchanged and also said it will carry out a USD25.0 billion share buyback between 2017 and 2020 as planned.
Shell will pay an interim dividend for the second quarter of 2015 of USD0.47 per share.
Shell said it is planning for a "prolonged downturn" in the market caused by lower oil prices and said its operating costs will fall by around USD4.0 billion in 2015, which will be a reduction of about 10%, which includes 6,500 job cuts.
Its capital expenditure in 2015 will total USD7.0 billion, which will be down 20% year-on-year. The company said further cost reductions are expected throughout 2016.
"Shell's integrated business and our performance drive are helping to mitigate the impact of low oil prices on our bottom line," said Chief Executive Ben van Beurden.
"As our results today show, we're successfully reducing our capital spending and operating costs, and delivering a competitive performance in today's oil market downturn," he added.
The company said it has made numerous changes to cope in a world of lower oil prices, even though the company sees potential for prices to recover to USD70 to USD90 per barrel in the medium term.
Shell's USD47 billion mega-merger with BG Group also remains on track, which will form a new company that will more profitable, said Shell.
"We will re-shape the company once this transaction is complete. This will include reduced exploration spend, a fresh look at capital allocation in longer term plays, and asset sales spanning upstream and downstream. This should concentrate our portfolio into fewer, higher value positions, where we can apply our know-how with better economy of scale. In essence, we 'grow to simplify'," added van Beurden.
In a later statement Thursday, Shell said it has sold a 33.24% stake in Showa Shell Sekiyu KK for around USD1.40 billion to Idemitsu. Shell said the sale is consistent with its strategy to concentrate its downstream footprint and to reduce the number of assets it holds.
Shell will retain a 1.8% stake in the company. The sale is the latest divestment in the downstream sector following the sale of downstream businesses in Italy, Australia, the UK, Denmark, Norway and France. The deal is expected to be completed in 2016.
The major said Japan "remains an important LNG market" for both the company's upstream and downstream divisions and said it will continue to license its brand to Showa Shell for use in its retail business.
Showa Shell, which has operated in Japan for around 11 years, refines crude oil imported from around the world at three refineries in Japan to sell it to customers as gasoline and other oil products at about 3,300 service stations throughout Japan. Showa Shell also has an "energy solutions" business which focuses on solar panels and two natural gas-fired power plants.
By Joshua Warner; [email protected]; @JoshAlliance
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