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Shell keeps spending despite profits fall

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By Ed Crooks

Published: January 29 2009 23:18 | Last updated: January 29 2009 23:18

Royal Dutch Shell will keep its capital spending programme steady in spite of the plunge in the oil price and a sharp fall in its profits.

The European Union’s biggest oil company said on Thursday it was delaying several projects, reducing its planned exploration for oil and gas resources and slowing its development of gas fields in the US.

However, it is planning capital spending of about $31bn-$32bn this year, slightly above last year’s $30bn, excluding acquisitions and disposals. Its commitment reflects pressure on big international oil companies to sustain investment to deliver growth, even as profits and cash flows are squeezed.

Chevron, the second-largest US oil company, which reports annual profits on Friday, said on Thursday its planned capital spending this year would be the same as in 2008 at $22.8bn.

Shell revealed its total oil and gas production could fall for a seventh year in succession this year. Output is expected to start to pick up next year as its long-term investment projects – such as the Pearl project in Qatar to convert gas to liquid fuels – begin to pay off, and is set to increase by 2-3 per cent a year in the early years of the next decade.

Project delays

Carmon Creek
oil sands, Canada

Athabasca oil sands expansion phase 2, Canada

Pierce oil field,
North Sea, UK

Mars B,
Gulf of Mexico, US

Slowdown in gas development in the US and oil and gas exploration

Analysts at S&P Equity Research warned they expected the next two years to be “challenging” for Shell if oil stayed below $50 a barrel. Jeroen van der Veer, the chief executive who steps down at the end of June, said the oil industry was in a “hard landing”, with the price of crude back at 2004’s levels of about $40 a barrel, but costs double what they were five years ago.

Although Shell’s profits last year were the largest yet for a European company, the fourth quarter saw a sharp fall. Net profit – adjusting for the effect of price changes on inventories – was $4.8bn, down 28 per cent from the equivalent quarter of 2007. That figure was boosted by one-off items, and excluding those effects profits were slightly below average expectations.

Full-year profits for 2008 were $31.4bn, up 14 per cent from $27.6bn, the previous European record, in 2007.

Mr van der Veer said Shell was “continuing the focus on capital and cost discipline”, although unlike some other big oil groups, including BP and ConocoPhillips of the US, he did not give a target for job cuts.

He said projects were being delayed not directly because of the fall in the oil price but because Shell expected to be able to sign contracts with suppliers at lower prices in the future.

There are signs that costs are falling, but there is typically a lag of 12 to 18 months before a drop in the oil price has its full effect. The planned delays will affect projects in the North Sea, the Gulf of Mexico and in Canada’s high-cost oil sands.

Shell’s oil sands business lost $30m in the fourth quarter, following a $371m profit in the third quarter.

Shell also revealed that it had a total $8.3bn deficit in its worldwide pension funds because of the fall in share prices last year. The figure is only about 5 per cent of its market capitalisation.

Shell said that in the fourth quarter its cash flow from operations was $10.3bn, while capital spending plus distributions to investors, including dividends and share buy-backs, was $9.5bn.

Share buy-backs were an “up-cycle phenomenon” and hence over, Shell said. But Mr van der Veer commented that the strategy remained “to pay competitive and progressive dividends”.

The dividend for the first quarter of 2009 will be up 5 per cent at 42 cents, compared with an 11 per cent increase in 2008.

Shell’s shares have strongly outperformed the FTSE?100 index over the past year, falling just 3 per cent while the index has declined 28 per cent, in part thanks to the dividend yield, which will be 6.7 per cent this year, as estimated by Merrill Lynch. The shares closed 25p higher on Thursday at £18.01.


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