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Shell profit plunges at least 42% as oil’s slump deepens

By Bloomberg / Bloomberg | January 20, 2016 : 5:13 PM MYT

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LONDON (Jan 20): Royal Dutch Shell Plc ( Valuation: None, Fundamental: None), which is buying BG Group Plc in the industry’s largest deal in a decade, expects fourth-quarter profit to drop at least 42% after the rout in crude prices deepened.

Profit adjusted for one-time items and inventory changes probably shrank to US$1.6 billion to US$1.9 billion, Shell said Wednesday in a preliminary earnings statement. That compares with the US$1.8 billion average estimate of nine analysts surveyed by Bloomberg, and profit of US$3.3 billion a year earlier.

BG also published a provisional results statement that showed its 2015 oil and natural-gas production will probably beat forecasts.

Crude’s collapse below US$30 a barrel has driven down Shell’s market value to the lowest in almost seven years and prompted concern it may be overpaying for BG’s production and cash flow. Shell has prepared for a prolonged market slump by cutting staff and spending. Job losses at both companies in 2015 and 2016 will exceed 10,000, including 2,800 after the combination takes effect, according to Chief Executive Officer Ben Van Beurden.

New Chapter

“Bold, strategic moves shape our industry,” Van Beurden said in the statement. “The completion of the BG transaction, which we are expecting in a matter of weeks, will mark the start of a new chapter in Shell, to rejuvenate the company, and improve shareholder returns.”

The average price of Brent crude, the international benchmark, fell 42% in the quarter from a year earlier to US$44.69 a barrel, the lowest since 2009.

Shell’s B shares, the class of stock used in the deal, dropped 4.4% to 1,309 pence in London at 8:33 a.m. local time. The stock has retreated 15% this year, extending last year’s 31% decline.

The company has justified the BG deal by saying it boosts its ability to maintain dividends, makes it the world’s biggest liquefied natural gas company and gives it oil and gas assets from Australia to Brazil.

Earnings Breakdown

Shell expects to earn US$400 million to US$500 million from its oil and gas production and LNG businesses in the fourth quarter. That includes US$1.6 billion to US$1.9 billion from the gas division, meaning the company will probably report a loss from oil, according to Richard Griffith, a London-based analyst at Canaccord Genuity Ltd.

“The surprise is the how strong the integrated gas business has been,” Griffith said by phone. “That’s a point Shell wants to make because the BG deal is the combination of two powerful gas companies.”

Aberdeen Asset Management Plc and Invesco Asset Management Ltd, two of Shell’s major shareholders, have said they will support its plan to buy BG even with crude’s decline. The acquisition allows The Hague-based Shell to accelerate the reshaping of its portfolio toward deepwater assets and gas, and BG’s production is likely to grow strongly in the next three to five years, Invesco fund manager Martin Walker said.

Standard Life Investments is the only Shell holder that has so far publicly said it will vote against the combination because the acquisition is “value destructive.”

BG Output

BG, the UK’s third-biggest oil company, said 2015 production probably averaged 704,000 barrels of oil equivalent a day, exceeding its forecast of 680,000 to 700,000 barrels a day. It expects to report full-year adjusted earnings of about US$1.7 billion, excluding earnings from asset sales, when it publishes final results Feb 5. That compares with profit of US$4 billion in 2014.

BG is also taking a net charge of about US$700 million in the fourth quarter to include non-cash post-tax impairment charges primarily because of the slump in oil and gas prices and a revision of reserves at assets including North Sea and Tunisia projects, the company said.

BG shares dropped 2.5% to 916.5 pence on Wednesday, extending their decline this year to 7%. Shell in April offered to pay 0.4454 of its B shares and 383 pence for each BG share. The discount of BG to the offer price was 5.3% at the close on Tuesday. It reached 12.6% on Dec 21.

Shell’s shareholders are scheduled to vote on the acquisition on Jan. 27 and BG’s the next day. Shell requires the backing of 50% of its holders. In BG’s case, votes in favor must represent at least 75% of the total value of the company’s shares. The merger will probably become effective Feb. 15. Shell will report final quarterly and full-year earnings on Feb 4.