It was reported Thursday that Shell earnings plunged by 73% last quarter compared to last year. Royal Dutch Shell (RDSa.L) blamed low oil prices and refining profits for the drop. Also contributing were higher charges associated with its $54 billion acquisition of the multinational British oil and gas company, BG Group.
Second-quarter net income, defined as ‘current cost of supplies,’ was just $1 billion, compared the $3.8 billion for the same quarter last year. This was also 54.5% less than the $2.2 billion earnings analysts were forecasting. Lower oil prices was a significant contributor to Shell earnings performance, as it has been across the whole oil and petrochemicals industry, particularly in the upstream. Additionally, analysts had misjudged the effects of cost cutting.
The company’s oil and gas production was higher than last year by 28% due to the contribution made by BG assets. This acquisition and necessary investment funding in spite of the low oil prices increased gearing to 28% at the end of the quarter compared to 12.7% same period last year. Operating activities cash flow for the second quarter was $2.3 billion, 62% down on last year’s $6.1 billion. This was insufficient to meet the dividend of $3.7 billion.
Weak prices had a significant impact on return on employed capital, this dropping to 2.5% against 12.7% last year. Shell’s cost-cutting targets were left unchanged Thursday, but the firm’s capital investment program had previously been reduced $29 billion for 2016 compared to $47 in 2014.
Shell’s targets include job losses of 12,500 2014-2016, and the company wants to sell off $30 billion of assets by 2018. Only $1 billion were divested in the second quarter of 2016 – this reflects another issue caused by low oil prices. Few firms are willing to purchase assets in the current climate.
The chief executive of Shell, Ben van Beurden, confirmed that “low oil prices continue to be a significant challenge for the business” and also commented that the integration of Shell and BG is “making strong progress and our operating performance continues to further improve.”
BP and Statoil have also reported poor second-quarter results although Total has done better. Year-on-year, Total’s adjusted net income was down 30%, but first to second quarter it actually rose by 33% to $2.2 billion. This is largely because Total’s figures benefited from a Brent price increase to $46 per barrel in the second quarter.
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