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Pessimistic Shell plans ‘substantial’ job cuts

Houston Chronicle

Bloomberg News

July 30, 2009, 5:45AM

Royal Dutch Shell Plc plans to reduce capital spending by about 10 percent next year and make further “substantial” job cuts, saying the economy won’t recover any time soon.

The budget to buy and maintain assets will drop to about $28 billion in 2010 from as much as $32 billion this year, The Hague-based Shell, whose North American operations are based in Houston, said today in a statement after posting a 67 drop in quarterly earnings. The company, which has cut senior management positions by 20 percent, said more staff reductions are “likely.”

The recession forced oil producers to delay projects and merge units, protecting dividends in anticipation of higher prices in the years ahead. BP Plc this week also warned of a prolonged economic slowdown, after its second-quarter earnings were dragged down by a 52 percent slump in U.S. crude prices.

“We are stripping away layers and overlaps to add more value and that means fewer people,” Shell Chief Executive Officer Peter Voser said today on a conference call. “The company is in a very competitive position and needs to sharpen focus” as the slowing economy puts “earnings under pressure.”

Net capital investment for the second quarter was $7.8 billion, according to the statement. Shell paid out $2.9 billion in dividends in the period and announced a quarterly dividend of 42 cents a share, a gain of 5 percent from a year earlier. The company doesn’t rule out freezing the payout at that level, Chief Financial Officer Simon Henry said on the call.

Shell’s work force shrank to 102,000 last year from 119,000 in 2003, according to data compiled by Bloomberg. Former CEO Jeroen van der Veer said in May that the company may be forced to cut jobs further in the event of a severe economic slowdown.

Voser, who took over from Van der Veer this month, has said Shell has become “too complex,” pledging to streamline operations by consolidating three units into two, focused on the Americas and the rest of the world. Shell is tapping so-called unconventional hydrocarbon deposits in Qatar and Russia to revive production growth after output dwindled for six years.

“This is necessary as they need to transform and become more efficient,” said Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking with a “hold” rating on the stock. “It will take at least a year before we start to see the benefits” of the restructuring, while the spending cuts may lead to the “same or slightly less activity” next year as this year, Kenney said today by telephone.

BP, Europe’s second-largest oil company, expects the economic recovery to be “long and drawn out,” CEO Tony Hayward said July 28 after posting a 53 percent slump in profit. Repsol YPF SA, Spain’s biggest oil producer, reported a 62 percent decline in earnings today as oil and gas prices retreated.

Shell’s net income dropped to $3.8 billion from $11.6 billion a year earlier, the company said in the statement. Earnings excluding gains and losses from holding inventories and one-time items were $3.15 billion, beating the $2.43 billion median estimate of 17 analysts surveyed by Bloomberg News.

“Conditions are likely to remain challenging for some time and we are not banking on a quick recovery,” Voser said in the statement. “Shell is adapting to this new situation and we must do more.”

Shell lost as much as 0.8 percent to 1,576 pence in London trading, and was at 1,582 pence as of 10:22 a.m. local time. The stock is down 12 percent this year, compared with a 3.8 percent decline for BP. Exxon Mobil Corp., the largest U.S. oil company, may post adjusted earnings per share of 98 cents when it reports today, according to the average of 16 estimates.

Shell’s quarterly crude and gas output fell 5.3 percent to 2.960 million barrels of oil equivalent a day on weaker demand for fuel and production disruptions in Nigeria, the company said in the statement. It previously said output may fall in 2009 for the seventh consecutive year, and forecast annual growth of 2 to 3 percent starting next year.

Shell is entering a “very uncertain period” in Nigeria, Voser said on the call. Militant attacks in the country have forced the company to shut plants, cutting onshore production to 140,000 barrels of oil equivalent a day in June. In 2004-2005, Shell pumped as much as 1 million barrels a day from the West African nation, along with partners.

Shell may implement further capital spending cuts next year if necessary and will seek better savings from suppliers, Voser said. The company is examining plans to sell 330,000 barrels a day of refining capacity, including plants in New Zealand, Canada and Germany, he said. It’s “more difficult” to get returns from downstream operations, he added.

Sales volumes of liquefied natural gas fell 6 percent from a year earlier to 2.89 million tons, mainly because of supply disruptions in Nigeria and reduced demand in the Asia Pacific region, Shell said. Excluding the impact of Nigerian cuts, LNG sales volumes would be 7 percent higher than the year-earlier quarter, it said in the statement.

Global oil demand will fall by 2 million barrels a day this year, the most since 1980, Voser said. European gas consumption will drop by 5 percent, he said, adding that the world’s energy supplies are “ample.”

Shell last month pledged to increase overall output through 2020 from existing reserves by starting new projects that can produce more than 1 million barrels a day.

In July, Shell started production at its Brazilian BC-10 deposit, which will have capacity of 100,000 barrels of oil equivalent a day. Oil and gas explorers are moving into harder- to-reach areas as fields in regions such as the North Sea and Siberia decline.

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