Shell 1Q earnings plunged 56% year-over-year

Royal Dutch Shell PLC reported first-quarter earnings on a current cost of supplies (CCS) basis, excluding identified items, were $3.2 billion, down from $7.3 billion during first-quarter 2014.

First-quarter total CSS earnings were $4.8 billion, up from $4.5 billion in first-quarter 2014. Compared with first-quarter 2014, CCS earnings, excluding identified items, benefited from improved downstream results reflecting steps taken by the company to improve financial performance, higher realized refining margins, lower costs, and increased trading contributions.

The direct impact of low oil and gas prices on the company comprised $4.7 billion, said Simon Henry, Shell chief financial officer, during the company’s earnings webcast on Apr. 30.

Weaker exchange rates resulted in a hurt to deferred tax positions of $700 million compared with 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 deepwater projects and improved operational performance.

Upstream earnings included a net gain of $1.86 billion, mainly reflecting a gain of $1.42 billion related to divestments and a credit of $600 million reflecting a statutory tax rate reduction in the UK  (OGJ Online, Dec. 3, 2014). These items were partly offset by asset impairments of $159 million. Earnings for first-quarter 2014 included a net charge of $283 million. Notably, Shell’s Americas businesses lost $1.1 billion.

Oil and gas production for the quarter totaled 3.17 million boe/d, down 2% compared with first-quarter 2014. Excluding the impact of divestments, Abu Dhabi license expiry, production-sharing contract price effects, and security impacts in Nigeria, first-quarter production was 1% higher than during the same period last year.

Downstream earnings included a net charge of $132 million. Earnings for first-quarter 2014 included a net charge of $2.58 billion.

Cash flow from operating activities for the first quarter was $7.1 billion. Excluding working capital movements, cash flow from operating activities for the first quarter was $7.5 billion.

Dealing with low crude prices

“Our results reflect the strength of our integrated business activities, against a backdrop of lower oil prices,” stated Ben van Beurden, Shell chief executive officer in the company’s earnings release. He said Shell is focusing sharply on its bottom line. “Part of this sharper focus is the sale of nonstrategic assets. Asset sales total over $2 billion so far this year, as we successfully reduced our onshore footprint in Nigeria,” van Beurden said.

Shell in March completed its assignment of interest in oil mining lease 29 (OML 29) and the Nembe Creek trunk line and related facilities in the Eastern Niger Delta to Aiteo Eastern E&P Co. Ltd. for $1.7 billion (OGJ Online, Mar. 25, 2015). Also that month, Shell completed its assignment of 30% interest in OML 18 in the Eastern Niger Delta to Eroton Exploration & Production Co. Ltd. for $737 million (OGJ Online, Mar. 20, 2015).

Henry explained, however, that “it’s becoming more difficult to divest” in the current environment. “Upstream divestments for the rest of the year we wouldn’t expect to be that material,” he said. Downstream divestments will continue, including the dropping of assets down into Shell Midstream Partners LP in the US.

Shell’s $70-billion acquisition of BG Group PLC, meanwhile, is expected to take 12 months to conclude, Henry said, due to the scale of the transaction (OGJ Online, Apr. 8, 2015). Explaining the rationale for the deal, van Beurden said the combination “would accelerate Shell's growth strategy in deepwater and LNG, and create a springboard for further optimization of our asset base, particularly when evaluating the longer-term portfolio.”

When asked if Shell might take part in further acquisitions, Harney said, “We don’t have a lot of cash left to be doing too much more.”

Van Beurden added that Shell continues to cut operating costs and capital spending, saying that “by deferring and reshaping new projects, we can achieve further efficiencies and savings in the global supply chain.” As with other oil and gas companies, Henry said Shell is in discussions with contractors to reduce costs.

In the Arctic, Henry said the company is currently preparing “a small armada of 25 vessels” and two rigs to send up to the Chukchi Sea as part of a 2-year drilling program comprising 3-4 exploration wells.

Contact Matt Zborowski at matthewz@ogjonline.com.

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