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Shell’s Earnings to Show Depth of Rout as Oil Extends Losses

Screen Shot 2016-01-18 at 14.27.35Shell will on Wednesday become the first major oil producer to announce annual earnings as it enters the final stages of its plan to buy BG Group Plc in the industry’s biggest deal in years. Investors will scrutinize those preliminary numbers for signs Europe’s largest oil company is doing enough to justify the acquisition as crude drops below $30 a barrel. 

Shell has cut thousands of jobs and reduced spending as Chief Executive Officer Ben Van Beurden prepares the company for a prolonged downturn while looking to BG to add production and cash flow. The 18-month slump in crude, the longest since the mid-1980s, has delayed $380 billion of investments in the industry, driven down profits and erased more than $2.7 trillion of oil companies’ market value.

“Oil companies have been cutting spending a lot, trying to react to the lower oil prices,” said Jason Gammel, a London-based analyst with Jefferies International Ltd. “But the slump has been so steep that they haven’t been able to keep up.”

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Oil prices have dropped to the lowest in 12 years and Goldman Sachs Group Inc. and Citigroup Inc. say there’s potential for further declines. Brent, the international benchmark, has tumbled 24 percent this year, extending last year’s 35 percent loss.

That has prompted analysts to cut their fourth-quarter 2015 and first-quarter 2016 adjusted earnings-per-share forecasts in the past month for Exxon Mobil Corp., Chevron Corp., Shell, Total SA, Eni SpA, Statoil ASA and Repsol SA, according to estimates compiled by Bloomberg. 

Shell’s profit for the three months through December probably fell 39 percent from a year earlier, a fourth consecutive quarterly decline, those estimates show. 

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At $30 oil, all operating and capital expenditure “reduction targets have to be revised up,” Aneek Haq, a London-based analyst with Exane BNP Paribas, said by e-mail.

The end of sanctions against Iran could bring thousands of additional barrels of oil to an already oversupplied market and drive prices down further. Brent dipped below $28 a barrel to the lowest since 2003 in London trading on Monday.

When Shell announced its plan to buy BG in April, Brent was above $55 a barrel. The slump has forced some investors to question if Shell is paying too much.

To ease those concerns, the company has reduced spending forecasts and plans to cut 2,800 jobs. Shell said last month that it expected 2015 operating costs to fall by $4 billion, and by a further $3 billion this year. The acquisition will break even with Brent crude prices in the low $60s and add to operating cash flow per share at $50 a barrel in 2016.

“Shell has more options to balance cash flows during this period, but it needs to demonstrate to a skeptical investor base that it is pulling on those levers with greater urgency post BG completion,” said Haq, who has an outperform recommendation on Shell.

Chevron is scheduled to announce fourth-quarter earnings on Jan. 29. Exxon and BP will follow on Feb. 2, Statoil on Feb. 4, Total on Feb. 11 and Eni at the end of that month. Shell will also announce full earnings on Feb. 4.


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