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Shell’s profits dive ahead of BG deal shareholder vote

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20 JAN 2016

Royal Dutch Shell has reported a sharp drop in profits just a week before shareholders vote on its planned takeover of smaller rival BG Group.

For the fourth quarter it expects profits of $1.6bn to $1.9bn, less than half the $4.2bn it made a year ago.

It expects full year profits of $10.4bn to $10.7bn, below its $10.8bn guidance.

The oil firm has issued the preliminary results to enable investors to have up-to-date information on its performance ahead of the vote on 27 January.

Its shares fell 3.7% in early trading.

But chief executive Ben van Beurden said he was “pleased” with the results.

“The completion of the BG transaction, which we are expecting in a matter of weeks, will mark the start of a new chapter in Shell, to rejuvenate the company, and improve shareholder returns,” he added.

Royal Dutch Shell’s results are calculated on the basis of replacement cost, which reflects the current cost of supplies and is widely seen as the best measure of an oil firm’s underlying performance.

Deal questioned

In April, Shell announced it had agreed to buy oil and gas exploration firm BG Group in a £47bn deal.

At the time oil was trading at around $55 a barrel, but has fallen sharply since then and is currently trading at around $28 a barrel, leading some to question the logic of the tie-up.

Standard Life, a key investor in Royal Dutch Shell, said earlier this month that the price of oil needed to be $60 a barrel for the takeover to make financial sense.

Despite the opposition, David Hunter, an energy industry analyst with Schneider Electric, said the deal was likely to be voted through.

“It’s clear that it’s a challenging deal but clearly there is the expectation that at some point in the future the oil price will recover.

“BG’s production is increasing 16% year-on -year and it is attractive to Shell for diversification,” he told the BBC.

Shell reiterated on Wednesday that it had cut operating costs by $4bn, or around 10%, in 2015, and expected to cut costs by a further $3bn this year. It has already said it will cut 10,000 staff if the deal with BG Group goes ahead and it said synergies though its tie-up with BG would be on top of the cost savings already outlined.

BG beats forecasts

In a separate announcement, BG Group said its oil production for 2015 would be better than it had outlined due to an increase in output from fields in Australia, Brazil and Norway.

The firm said its LNG shipping and marketing unit, one of the main attractions for Shell, will report 2015 core earnings of at least $1.4bn, in line with expectations, it said.

“Our excellent operational performance in 2015 is expected to deliver results in line with, or ahead of, our guidance for the year,” said BG chief executive Helge Lund.

BG shareholders will vote on the deal on 28 January, which requires the support of 50% of Shell shareholders and 75% of BG shareholders to go ahead.

If investors do approve, the deal is expected to complete by February 15.

Oil price falls

The drop in the price of oil has been driven by oversupply, mainly due to US shale oil flooding the market.

At the same time, demand has fallen because of a slowdown in economic growth in China and Europe.

The world’s energy watchdog warned on Tuesday that the market could “drown in oversupply”.

The International Energy Agency, which advises countries on energy policy, said it expected the global glut to last until at least late 2016.

Investors fear the lifting of Western sanctions on Iran could worsen the existing oversupply problem, with the country’s deputy oil minister Roknoddin Javadi predicting it can produce an extra 500,000 barrels per day.

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