30th Apr 2015 09:20
LONDON (Alliance News) - Royal Dutch Shell PLC Thursday said its pretax profit fell as expected in the first quarter of 2015 after its upstream division took a substantial hit caused by the fall in oil prices which was partially offset by an improved performance from the downstream division and said it has further cut its capital investment budget and reduced costs as part of its ongoing cost control programme.
Despite the fall in earnings, the oil and gas major, which is in the process of acquiring BG Group PLC, outstripped analyst consensus, with production also being above expectations.
The FTSE-100 major reported a pretax profit of USD5.83 billion in the first quarter of 2015, a significant fall from the USD8.54 billion in the same period a year earlier, as the company's upstream division was hit by lower oil prices and reduced trading contributions, partially offset by an improved performance from the downstream division.
Revenue tumbled to USD68.84 billion from USD112.07 billion due to a slight fall in production combined with the weak global oil price. Shell said oil prices in the quarter were around 50% lower from a year ago with gas prices falling by nearly a third, adding that gas prices fell even further in North America. The fall in prices contributed a USD4.7 billion fall in earnings from the upstream division, it said.
Shell's closely-watched current cost of supply earnings in the quarter reached USD4.8 billion in the first quarter of 2015, slightly up from USD4.5 billion in the same period a year earlier. However, Shell's current cost of supply earnings excluding divestment gains, tax credits and other items more than halved to USD3.2 billion from USD7.3 billion.
Analysts at Liberum said Shell's current cost of supply earnings excluding items of USD3.2 billion were well ahead of the consensus of USD2.4 billion.
Shell 'A' shares are up 0.9% at 2,071.50 pence Thursday morning, while 'B' shares are up 1.3% at 2,095.50p.
Compared with the first quarter 2014, current cost of supply earnings excluding identified items benefited from improved downstream results reflecting steps taken by the company to improve financial performance, higher realised refining margins, lower costs, and increased trading contributions. In Upstream, earnings were impacted by the significant decline in oil and gas prices and lower trading contributions.
The identified items include a net gain for the upstream division of USD1.86 billion which comprised of a USD1.41 billion gain on divestment from Nigeria and a tax credit of USD600 million in relation to the statutory tax rate reduction in the UK, partially offset by impairments of USD159 million. Downstream identified items include a net charge of USD2.58 billion.
Weaker exchange rates resulted in a hit to deferred tax positions of some USD700 million compared with the first quarter 2014, which were not included as identified items. This was partly offset by lower costs and new high-margin liquids production volumes from new deep-water projects and improved operational performance, said Shell.
Shell said its quarterly dividend would remain flat at USD0.47 per share.
"Our results reflect the strength of our integrated business activities, against a backdrop of lower oil prices. Meanwhile, in what is clearly a difficult industry environment, we continue to take steps to further improve competitive performance by redoubling our efforts to drive a sharper focus on the bottom line in Shell," said Chief Executive Ben van Buerden.
The downstream segment experienced a lift in earnings excluding items in the quarter, to USD2.6 billion from USD1.6 billion which partially offset the upstream division which reported earnings of USD700 million compared to USD5.7 billion. The main cause of the upstream slide was the fall in oil prices, which contributed USD4.7 billion of the earnings reduction.
The upstream division just missed on analyst consensus of USD788 million, whilst the downstream segment comfortably beat the consensus of USD1.62 billion.
Shell said it continues to curtail capital investment, with organic capital expenditure expected to total USD33.0 billion or less in 2015, compared to the company's original guidance of USD35.0 billion.
Analysts at Nomura said Shell's reduction in capital expenditure guidance shows it is reacting sensibly to the downturn in oil prices, adding the reduction "will be welcome".
"In parallel we continue to reduce our operating costs and capital spending; and by deferring and reshaping new projects, we can achieve further efficiencies and savings in the global supply chain," said Shell's van Beurden.
Oil and gas production totalled 3.2 million barrels of oil equivalent per day, down 2% from a year earlier due to divestments in Nigeria, licenses expiring, and production sharing contract price effects, alongside security impacts in Nigeria which reduced production by around 190,000 barrels of oil per day. However, like-for-like production actually rose by 1% compared to year earlier.
Liberum said production of 3.2 million barrels of oil equivalent per day also was slightly better than expectations.
Oil products sales remained flat from a year earlier, whilst chemical sales fell by 2% and refinery intake volumes were 3% lower compared with the same quarter last year.
Shell's cash and shares takeover bid for BG Group was announced in April, valuing BG at around GBP47 billion and marking the biggest UK to UK acquisition ever. Shell is hoping to complete the deal early in 2016.
On Thursday, Chief Financial Officer Simon Henry told journalists that Shell's current strategy remains unchanged, re-emphasising the deal will benefit both Shell and BG shareholders. Shell is set to experience financial growth through two main areas that will be helped by BG: deep water exposure in Brazil and global growth in the liquefied natural gas market.
Henry added that further divestments in 2015 are unlikely to have a material effect on the remaining results in the year, adding that in the first quarter it divested from USD2.2 billion worth of assets in Nigeria. Further divestment in the upstream division in 2015 will be fairly limited whilst downstream divestment will continue, he said.
Henry said that the liabilities associated with offshore oil spills in Nigeria have been transferred with the sale of the assets in the country. Shell sold the assets as part of its restructuring, adding that it retains an onshore presence that focuses more on gas than oil and that it sold the assets to indigenous companies as encouraged by the government.
Shell recently announced downstream divestments including the sale of petrol stations in the UK and the sale of its marketing division in Denmark.
Henry said that drilling in the Arctic will progress with Shell planning a two-year drilling programme of three to four wells to assess the potential value of the area.
By Joshua Warner; [email protected]; @JoshAlliance
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