Ambitious plans to boost growth will cost too much and knock Shell off its top spot, the City warned yesterday. Unveiling disappointing results, the Anglo-Dutch oil group further unnerved investors when it said it planned to spend even more heavily on new oil and gas projects.
Analysts said that Shell would make lower returns from the huge outlays, leaving less room to raise its dividend significantly. The company, which has outperformed its rivals over the past 18 months, would struggle to maintain its position at the front of the pack, they added.
Despite having ratcheted up spending in recent years, Shell missed its production target in 2011. Profits of $4.8 billion in the fourth quarter were 18 per cent higher than last year, mainly because of record oil prices, but about 6 per cent lower than forecast.
Shares in Shell dropped by more than2 per cent in early trading, but recovered to close down 1.2 per cent at £22.97.
Stuart Joyner, analyst at Investec, said that Shell was having to spend “more for less” with the rising investment bringing in lower returns.
He predicted that analysts would slash their profit forecasts for the company and added that Shell’s earnings this year were likely to be flat, particularly after it booked a $287 million loss from its downstream refining and marketing division. This was after a fire at its Singapore refinery wiped $200 million off the bottom line and because of an industry-wide collapse in refining margins in the fourth quarter.
Analysts at Citigroup said Peter Voser, the chief executive, had failed to convince investors that the group could make the best investments to continue its recent run of stellar growth.
“After significant sector and market outperformance over the last 18months, we viewed further outperformance as dependent on management convincing that the company can continue to reinvest more profitably than peers,” they wrote. “The new medium-term strategy fails to offer that differentiated story.” Even Shell’s modest dividend rise – its first for three years – disappointed as it was less than expected.
Mr Voser admitted at the results presentation that Shell’s profits have fluctuated wildly in recent years because of seesawing oil and gas prices and are likely to continue to do so. ‘We are in a world where volatility has increased,” he said. He unveiled a new target to increase cashflow of $136 billion between 2008 and 2011 by up to 50 per cent over the next four years. He said that Shell would produce 4 million barrels of oil a day by 2018, a 20 per cent increase on current levels.
This year Shell will produce more gas than oil for the first time. It already produces more liquefied natural gas than any other oil company. The company will spend about $6 billion this year on developing its shale oil and gas projects, particularly in North America. Some $1 billion of this will go on producing oil and other liquids from shale rock, mainly at its giant Eagle Ford field in Texas.
The value of Shell’s shale gas assets was underlined yesterday when PetroChina bought a 20 per cent stake, thought to be worth $1 billion, in the company’s Groundbirch assets in Canada.