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Shell set to report a near 50% collapse in fourth quarter earnings

Scotland on Sunday

Shell braced for sharp drop in earnings as oil price tumbles

Date: 25 January 2009
ENERGY giant Shell is this week set to report a near 50% collapse in fourth quarter earnings amid warnings that the oil price could dip below $30 a barrel.

Outgoing chief executive Jeroen van der Veer, who will be replaced by Peter Voser in July, faces a difficult end to his time in office as analysts warn that the major oil companies will this year have to scale back investment programmes and even cut jobs.

Although Shell is expected to report record earnings of around $30.6bn for the whole of 2008 when van der Veer updates the markets on Thursday, analysts say this will be tempered by a poor performance in the final three months of 2008 and a challenging outlook for the year to come. 

Fourth quarter earnings are tipped to come in at $4.16bn, down 48% on the company’s $8.04bn haul in the previous three months, and down almost 30% on the same period in 2007.

After hitting a peak of $147 a barrel last July, oil was trading at around $42 last week, and there are concerns the price has not yet bottomed out. 

Although oil producing countries are reducing output, energy analysts warn there will be a long time lag until the changes filter through to market prices. 

“People have talked about the oil price going below $30 a barrel and it has definitely got the downside potential to do that in the short to medium term,” said David Hunter, consultant at utility specialists McKinnon and Clarke.

Energy analysts expect the oil price to average just $58 this year before recovering slightly to $80 in 2010 and $95.50 in 2012.

The collapse in oil prices is expected to have a significant effect on energy companies’ development projects. The City will be keeping a close eye on whether van der Veer scales back investment plans.

Shell has already delayed projects in Canada and analysts at HSBC say the company faces a cash squeeze as it will be forced to balance falling revenues and ongoing investment needs. HSBC says the company is facing negative cashflow for the next two years, although Shell is regarded as one of the stronger energy companies, with comparatively little debt.

Charles Stanley analyst Tony Shepard said: “Shell is one of the most conservative of the oil companies and it has low gearing at the moment. It is also very well spread in its operations. I think it can weather things well because it is starting from a very strong position.”

But Shell will not be the only energy company facing a difficult year. BP, which updates the markets on February 3, has already warned that the oil price slump cost it $6bn in the final three months of 2008. 

Jason Kenney, analyst at ING, expects average fourth quarter earnings across the industry to be down 27% compared with the same period in 2007.

The depressed oil price will mean good news for households and there are hopes a number of energy providers will shortly follow Scottish Gas-owner Centrica into cutting fuel bills. But in the long term, analysts and energy companies are warning prices are set for another dramatic surge upwards. 

“To an extent, the further the oil price falls, the more radical the rebound is like to be,” said Hunter.

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