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Royal Dutch Shell’s profits fall 58pc on oil price slide

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Hard times: Royal Dutch Shell’s profits more than halved in the first quarter as oil prices tumbled Photo: Bloomberg News


Royal Dutch Shell’s profits more than halved in the first quarter as oil prices tumbled, forcing the energy group to increase its debt to support both the dividend and its investment programme.

Despite the 58pc fall in profits to $3.3bn on a current cost of supplies basis, which takes into account changes in the value of oil and distillate inventories, Shell beat consensus forecasts of $2.6bn. The group’s performance for the three months to March reflected the oil price, which averaged $43.20 over the period compared with $97.86 in the first quarter of 2008.

As a result, cash flow from its operations was just $7.6bn, significantly lower than the $16.9bn in the same period last year and not enough to support its capital expenditure programme and dividend. To compensate, the company increased its borrowing.

Gearing rose to 6.6pc from 1.9pc to cover the $1.7bn cash shortfall after capital expenditure of $6.9bn in the quarter and the $2.4bn cost of the dividend. However, the company’s ratio of debt to equity is well below that of its main rival BP, which stands at 23pc. Shell expects gearing to rise to more than 20pc by December this year.

The company increased its first quarter dividend payout by 5pc to 42 cents per share, in line with its previous guidance. The dividend will be paid on June 10.

Although the profits beat forecasts, earnings at its exploration and production division were disappointing and analysts expressed concern about future production growth. Charles Stanley analyst Tony Shepard said: “The 74pc decline in exploration & production earnings could be the worst performance compared to the peer group.” He maintained a hold stance on the shares.

Total production in the period fell compared with the first quarter of 2008, with output standing at 3.396m barrels of oil equivalent in compared with 3.377m barrels in the first three months of 2008.

The company’s high-cost oil sands operations in Canada made a loss of $42m, compared with a profit of $249m profit in the first three months of 2008.

In order to meet future payments on its pension scheme, the group plans to inject $5bn into the fund during 2009, compared with its usual annual contribution of $1bn-$2bn.

Jeroen van der Veer, chief executive, said: “We continue to make significant investments in the company for future profitability. Industry conditions remain challenging, and our focus is on capital discipline and costs.”

The company does not expect the oil price to rise significantly in the next 18 months. Peter Voser, the current finance director who takes over as chief executive on July 1, said: “It will take time for the economy to recover, and hence the oil and gas price will be affected by that.”

The shares added 29p to £15.39

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