Shell Profits Halve On Lower Prices (Update)
(Updates with comments from press conference)
Profits at Shell halved in the second quarter, as a result of weakened performance across all the Anglo-Dutch major’s key business segments. But CEO Ben van Beurden and CFO Jessica Uhl told press that it was still on track for its free cash flow target of $28bn-$33bn by end-2020.
The company reported on August 1 an income of $3bn for the three-month period, down from $6bn in the first quarter of this year and $6.02bn for April through June 2018. Revenues dipped 6.4% yr/yr, arriving at $90.54bn. Return on average capital employed is 8.2%, expected to 10% by end-2020.
Earnings on a current cost of supply (CCS) basis excluding identified items slumped 26% yr/yr to $3.46bn in the second quarter, with CCS earnings from Shell’s integrated gas business down 25% at $1.73bn. Upstream and downstream saw declines of 8.4% and 20% respectively to $1.34bn apiece, while corporate losses widened 32% to $806mn.
Shell said its worsened results reflected lower oil, gas and LNG prices, slimmer chemicals and refining margins and higher provisions. The company’s realised liquids price declined 8% yr/yr, while its gas price dropped 13%. It also suffered from poor performance at its Gulf of Mexico wells and from turnarounds and industrial action at some chemicals sites.
Uhl said that only about 30% of its LNG business was related to spot prices, and it is both a buyer and a seller in those markets. Nevertheless lower gas prices had a $150mn impact on LNG trade, quarter on quarter. The rest of its sales are crude indexed, and the company expects crude to remain at or above $60/barrel in real terms, meaning $65/barrel in 2020.
Shell’s cash flow reached $11bn from $9.5bn a year ago, although free cash flow shrunk from $9.53bn to $6.87bn.
“We have delivered good cash flow performance, despite earnings volatility, in a quarter that has seen challenging macroeconomic conditions in refining and chemicals as well as lower gas prices,” CEO Ben van Beurden said.
Earnings were also propped up by a 4% growth in oil and gas production, aided by the launch of Shell’s deepwater Appomattox project in the Gulf of Mexico and the shipment of first cargoes from the Prelude LNG terminal off Australia. Expected to be contributing to cash flow some years ago, Prelude will bring in more money from this quarter onwards as it ramps up. So far it has produced four LNG cargoes, Uhl said, with three condensate and one LPG cargo.
Van Beurden appeared relaxed about even a no-deal Brexit, a possibility that the prime minister Boris Johnson has warned of. Van Beurden said Shell had to prepare for a range of eventualities, "but in reality the impact will be small, it is not an issue for us."
Shell joins France’s Total in reporting weakened earnings for the second quarter. Its rival BP managed to buck this trend, maintaining stable profits in the three-month period. US counterparts Chevron and ExxonMobil are due to report their results on August 2. Next quarter's earnings will reflect the completion of the $1.9bn sale of its Danish assets to Noreco July 31, announced in October.