Shell posts $6bn loss as costs of failed Alaska exploration bite

Royal Dutch Shell on Thursday joined other major oil companies in announcing a grim set of quarterly earnings this week, although the market took the news in stride.

The biggest hit to profits for the Anglo-Dutch group came from a charge of more than US$8 billion to reflect the losses from its failed effort to find oil in the Chukchi Sea off Alaska’s northern coast, as well as from write-downs in the value of assets due to the oil price crash and costs associated with cutting more than 6,000 employees.

While the Shell report stood out because of the hefty asset writedown, the loss was expected and its share price was up nearly $0.53 on the day at $53, and up from $46.55 at the end of September.

Shell reported an overall loss of $6bn for the three months to the end of September, compared with a $5.3bn profit in the third quarter last year, as higher earnings from refining and higher upstream output could not alleviate the decline in upstream earnings.

Excluding the write-downs, replacement cost profit (which accounts for the changing cost of inventory and is the industry’s standard measure) was $1.8bn for the quarter, which was 70 per cent below its $5.8bn profit for last year’s third quarter.

Total of France also reported that its net earnings fell 23 per cent in the third quarter to $2.8bn, versus $3.6bn last year, which was not as bad as some bank analysts had predicted because of better-than-expected production volumes and progress on cutting costs.

Total’s share price was also up on the day at $48.49, a gain of $0.28.

This week, BP said its replacement cost quarterly profit was $1.8bn, down from $3bn last year.

The fact that the large oil companies have been reporting declines in earnings comes as no surprise as oil prices have plummeted from $115 a barrel in mid-2014 to below $50 currently.

Eni, an Italian integrated oil company, reported on Thursday that it too lost money in the quarter. The company, which is 30 per cent owned by the Italian government, said it lost €952m in the quarter, compared to last year’s €1.71bn profit. Eni also announced that it planned to sell Saipem, its oil and gas services unit, to Fondo Strategico Italiano, a government investment fund.

PetroChina, the listed arm of the Chinese government’s largest oil concern, posted a sharp decline also, with quarterly profits of 5bn yuan down from 28bn yuan for last year’s quarter. The company’s earnings statement described the environment as “complicated and grim”.

Shell’s chief executive, Ben van Beurden also alluded to the tough market conditions but said steps were being take to alleviate them.

“We have halted exploration activities in offshore Alaska and stopped the construction of the Carmon Creek in situ oil project in Canada,” Mr van Beurden said. “These are difficult but impactful decisions. I am determined that Shell will become a more focused and competitive company as a result.”

He added that Shell’s $70bn deal to buy BG and move its portfolio more towards gas remained on track.

Analysts said there were signs that the worst is out of the way. French bank Société Générale, for example, raised PetroChina from a “hold” to a “buy” recommendation as it has been beating targets on production. PetroChina shares closed 2 per cent higher at HK$6.19 in Hong Kong, although before the earnings report came out.

“I think if you look at the share price response to this week’s earnings, it was largely baked in,” said Virendra Chauhan, an analyst at Energy Aspects.

“I think there are a few one-off distortions like Shell’s impairments due to project cancellations but, in some ways, the market is taking this as a positive because they are seeing it as the company reducing capex and therefore resetting them to a lower oil price environment.”

The companies are getting the market used to the lower oil price environment and have announced billions in project cancellations, including a cut this year of $5bn by Shell to $30bn.

“The majors are focusing on execution and new project delivery for which most of the capital expenditure is already sunk or they have realised some cost deflation to show how they are adapting and moving the company to being free-cash-flow positive in a $50 crude price environment,” Mr Chauhan said.

Taking the pain now in the form of asset write-offs and cost cutting will mean future earnings are likely to be flattered by the comparison.

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