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Shell outpaces peers with profit growth, keeps spending

Published 30/10/2014, 13:07
© Reuters A logo for Shell is seen on a garage forecourt in central London
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By Ron Bousso and Dmitry Zhdannikov

LONDON (Reuters) - Royal Dutch Shell (L:RDSa) has outpaced peers with a forecast-beating rise in quarterly profit and said it would spend heavily next year on key projects, even as oil majors prepare to weather the full impact of a sharp drop in oil prices.

European peers BP (L:BP), Total (PA:TOTF) and Eni (M:ENI) have all met or beaten analysts' forecasts in a third quarter that ended before the worst of the price fall -- but Shell saw the biggest increase.

Its adjusted net profit climbed 31 percent, thanks to more profitable new production and improved refining.

Oil prices have slumped over the past four months by more than 20 percent to a four-year low near $85 a barrel due to slowing global demand particularly in China and ample supplies, erasing billions from oil companies' market value.

Benchmark Brent crude oil prices, however, averaged $103 a barrel in the third quarter.

The declining oil prices and the prospect of pain ahead have forced companies to review some low-margin projects and increased the urgency of asset sales that have so far cushioned the impact of weaker revenues.

Shell has so far this year sold $12 billion 7.50 billion British pounds) of assets, including the sale of its downstream Australian business in the quarter, putting it on track to hit a target of $15 billion.

That compares with $50 billion worth of assets sold or being sold by BP and $40 billion by Total, as majors have come under pressure from shareholders to increase dividend payouts.

"It is quite likely we will take a very close look at levels of investment where we have flexibility if we see the oil price weakness persisting," Chief Financial Officer Simon Henry said.

Shell, Europe's biggest oil company by market value, is "less likely", however, to go ahead with some unconventional shale oil developments in the U.S. Permean basin and in West Canada, if oil hits $80 a barrel, he said.

But cuts will not slow its bigger projects and organic capital expenditure will likely remain flat in 2015 at this year's $35 billion level.

"The worst thing we can do is stop a project in mid flow, because that means value destruction," Henry said. "We do have some flexibility in exploration, in small projects, in refining, mature upstream assets and in unconventional shale business."

SWEET SPOT

Shell's adjusted net profit in the third quarter hit $5.8 billion, with the company maintaining its dividend quarter-on-quarter and increasing it 4 percent year-on-year, as both upstream and downstream divisions delivered strong results.

Earnings nevertheless declined from the second quarter of the year, mostly due to weaker oil prices.

Shell has one of the most robust balance sheets in the sector, with stronger debt ratios than its peers. Analysts expect it to maintain its dividend payout and continue to buy back shares, even in the face of weaker prices.

But analysts also said Shell would not be immune from the strain on the broader sector, and some questioned whether it was doing enough.

"We remain somewhat concerned that the business improvement initiatives begun by new CEO Ben van Beurden will not be sufficient to offset this seasonal weakness, which is likely to be amplified by the current macro headwinds," said BMO analyst Iain Reid.

Strong refining margins as a result of the lower crude oil prices lifted Shell's downstream earnings in the third quarter, doubling profit to $1.8 billion from a year earlier.

Shell's oil and gas production in the quarter was 5 percent lower than in the same quarter last year at 2.79 million billion barrels of oil equivalent per day, as the ramp up of production in the Gulf of Mexico and West Africa failed to offset the expiry of the Abu Dhabi licence.

© Reuters. A logo for Shell is seen on a garage forecourt in central London

Shell also said on Thursday it had appointed former banker Charles Holliday as its chairman. Holliday, a former chairman of Bank of America, will take over from current chairman and former boss of Finland's Nokia (HE:NOK1V), Jorma Ollila, in 2015.

(Editing by Susan Thomas and Clara Ferreira Marques)

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