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The Secret Behind Better Oil Major Earnings

By Gregory Brew – Aug 02, 2017, 6:00 PM CDT

After several years of austerity and belt-tightening, the major international oil companies posted substantial profits in Q2 of 2017. The five largest private oil companies together generated more than $30 billion in profit, an indication that most have successfully adapted to the current bout of low prices, while a few have publicly indicated their belief that prices will hover around $50 for the foreseeable future.

What this means is that the “mega projects” that dominated many companies’ balance sheets for the last decade will become increasingly rare, as the majors pivot towards short-term, low-risk ventures with a faster turnaround.

Royal Dutch/Shell beat expectations with a strong earnings report, posting a $3.6 billion profit in Q2 of 2017, tripling its earnings from a year ago. Shell managed its improvement through cutting costs in the face of low prices, which the CEO believes might improve in the short term. He’s stated that Shell will be “resilient to oil prices,” and will follow improved efficiency with a more diverse portfolio.

Upstream profits were $339 million, a major improvement from Q2 of 2016 when Shell posted a $1.3 billion loss. Production nevertheless declined from 3.752 million boe/d to 3.495 million boe/d, a trend which will continue as Shell sheds assets in Malaysia and Australia. The company’s debt-to-assets ratio improved, though last year was marked by Shell’s massive acquisition of BG Group for $54 billion.

Anticipating “lower for longer” oil prices, Shell has positioned itself as the most forward-looking major company. It’s CEO says he intends to purchase an electric car, Shell followed the BG Group purchase with statements that the future would be in cleaner fuels like natural gas, rather than conventional oil, and unlike the US majors Shell sees peak oil demand coming as soon as the 2030s, according to its CEO.

Shell plans on spending $1 billion on its New Energies division to prepare for the transition toward renewable power and electric cars. It’s very likely that Shell will follow its current round of divestments by shedding even more assets, pulling itself away from traditional upstream activities and diversifying to meet changing future demand and persistent low prices. FULL ARTICLE

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