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What The Hell, Shell? Oil Giant Warns On Disastrous Quarter

Screen Shot 2013-10-01 at 07.56.54Royal Dutch Shell released a dreadful profit warning today. …a few more quarters like this one and the pressure will mount on CEO van Beurden to start slashing that capex and put Shell into a managed shrink-down like CEO Robert Dudley has been forced to do at BP. Earlier this week The Financial Times reported that Shell plans to divest some $15 billion worth of assets over the next two years. The magnitude of Shell’s shortcoming caught even the sharpest pencils off guard. “We’re a bit shell-shocked this morning after this profit warning… And we all remember its 2012 arctic drilling fiasco in Alaska. All told, mighty Shell is losing money on its oil and gas fields in the United States.

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Christopher Helman, Forbes Staff: 1/17/2014 @ 9:46AM

Royal Dutch Shell released a dreadful profit warning today. Fourth quarter earnings are expected to come in at $2.2 billion, down from $7.3 billion a year ago. Full year earnings will be down almost 40% to $16.8 billion. Upstream earnings were off 45% year-over-year, while downstream refining earnings plunged 58%. Topping it off, in the past year Shell’s oil and gas volumes have slumped roughly 13% to 2.9 million barrels of oil (and natural gas equivalents) per day.

How could this happen at a time when oil prices have been hovering around $100 and demand for liquefied natural gas remains strong? Shell cited high maintenance expense, especially at its gas-to-liquids plant in Qatar. Deteriorating security in Nigeria also was a hit. Refining margins continued to be poor in Asia and Europe.

But perhaps the biggest single hit to earnings in the quarter was the $700 million asset impairment charge believed to be tied to Shell’s lackluster exploration venture in the Eagle Ford shale of Texas. In 2010 Shell leased a 100,000 acre ranch in south Texas from Houston oilman Dan Harrison, paying a bonus of $1 billion. Shell thought the land would help them play catch up in the prolific Eagle Ford shale. Yet after a few years of expensive drilling and fracking, Shell came to realize that that deal had been pretty much a dud. It’s also believed to have had lackluster results in the Mississippi Lime play of Kansas. And we all remember its 2012 arctic drilling fiasco in Alaska. All told, mighty Shell is losing money on its oil and gas fields in the United States.

The magnitude of Shell’s shortcoming caught even the sharpest pencils off guard. “We’re a bit shell-shocked this morning after this profit warning, which is highly unusual for an integrated oil company,” wrote Oswald Clint of Bernstein Research in a note this morning. A miss of his magnitude makes you wonder whether similar disappointments await investors in the likes of BP BP +1%, Chevron CVX +1.15%, ExxonMobil and Total TOT +0.24%. After all, Shell is not the only Big Oil playing catch up in shale plays and dealing with political uncertainty in Nigeria and elsewhere. For now, Clint thinks “this is much more Shell specific than a sector wide phenomenon.”

How will Shell turn it around? Figuring that out falls to new CEO Ben van Beurden. “Our 2013 performance was not what I expect from Shell,” he said today. “Our focus will be on improving Shell’s financial results, achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery.”

When it comes to capital spending, a little improvement will go a long way. In 2013 Shell generated $40.4 billion in cash flow, but used it all up, and then some, with a remarkable $44.3 billion worth of capital spending on new projects such as deepwater developments in the Gulf of Mexico and LNG in Australia. Will all that new investment help Shell find new profitability in the years to come? Investors sure hope so.

But a few more quarters like this one and the pressure will mount on CEO van Beurden to start slashing that capex and put Shell into a managed shrink-down like CEO Robert Dudley has been forced to do at BP. Earlier this week The Financial Times reported that Shell plans to divest some $15 billion worth of assets over the next two years. At some point it just makes more sense to milk old low-cost oil and gas fields for cash rather than quixotically attempt to replace those cheap old barrels of easy oil with tough, expensive new ones.

Shares in Shell’s ADRs were off 1.2% at the market open.

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