Shell’s earnings to show depth of rout as oil extends losses
ENERGY MAJOR HAS CUT THOUSANDS OF JOBS, SLASHED SPENDING AS PRICE SLUMP BITES The 18-month slump in crude oil prices is the longest the industry has seen since the mid-1980s.
Royal Dutch Shell Plc will this week reveal how deep the oil rout goes as energy companies reel from the worst market crisis in decades. Shell will tomorrow become the first major oil producer to announce annual earnings as it enters the final stages of its plan to buy BG Group Plc in the industry’s biggest deal in years.
Investors will scrutinise those preliminary numbers for signs Europe’s largest oil company is doing enough to justify the acquisition as crude drops below $30 (Dh110) a barrel.
Shell has cut thousands of jobs and reduced spending as CEO Ben Van Beurden prepares the company for a prolonged downturn while looking to BG to add production and cash flow.
The 18-month slump in crude, the longest since the mid-1980s, has delayed $380 billion (Dh1.39 trillion) of investments in the industry, driven down profits and erased more than $2.7 trillion of oil companies’ market value.
“Oil companies have been cutting spending a lot, trying to react to the lower oil prices,” said Jason Gammel, a Londonbased analyst with Jefferies International Ltd. “But the slump has been so steep that they haven’t been able to keep up.”
Oil prices have dropped to the lowest in 12 years and Goldman Sachs and Citigroup say there’s potential for further declines. Brent, the international benchmark, has tumbled 24 per cent this year, extending last year’s 35 per cent loss.
That has prompted analysts to cut their fourth-quarter 2015 and first-quarter 2016 adjusted earnings-per-share forecasts in the past month for ExxonMobil, Chevron, Shell, Total, ENI, Statoil and Repsol, according to estimates compiled by Bloomberg.
Shell’s
profit
for
the
three months through December probably fell 39 per cent from a year earlier, a fourth consecutive quarterly decline, those estimates show. At $30 oil, all operating and capital expenditure “reduction targets have to be revised up,” Aneek Haq, a Londonbased analyst with Exane BNP Paribas, said by email.
The end of sanctions against Iran could bring thousands of additional barrels of oil to an already oversupplied market and drive prices down further.
Oil companies have been cutting spending a lot, trying to react to the lower oil prices. But the slump has been so steep that they haven’t been able to keep up.”
Jason Gammel
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Analyst at Jefferies International
Brent dipped below $28 a barrel to the lowest since 2003 in London trading yesterday.
Overpaying?
When Shell announced its plan to buy BG in April, Brent was above $55 a barrel. The slump has forced some investors to question if Shell is paying too much.
To ease those concerns, the company has reduced spending forecasts and plans to cut 2,800 jobs. Shell said last month that it expected 2015 operating costs to fall by $4 billion, and by a further $3 billion this year.
The acquisition will break even with Brent crude prices in the low $60s and add to operating cash flow per share at $50 a barrel in 2016.
“Shell has more options to balance cash flows during this period, but it needs to demonstrate to a sceptical investor base that it is pulling on those levers with greater urgency post BG completion,” said Haq, who has an outperform recommendation on Shell
Chevron is scheduled to announce fourth-quarter earnings on January 29. Exxon and BP will follow on February 2, Statoil on February 4, Total on February 11 and ENI at the end of that month. Shell will also announce full earnings on February 4.