Shell warns on earnings

Taking over one of the top oil jobs would never be easy, but for Shell CEO Ben van Beurden announcing a drop in earning for his company was likely difficult. It’s never a good sign for the global economy when energy companies are seeing earnings decline.

The Wall Street Journal’s Justin Scheck had this story about the announcement:

The steep costs of oil and gas development from Canada to Kazakhstan, sometimes with little to show for the giant investments, came back to haunt Shell on Friday when it announced its first profit warning in 10 years.

The Anglo-Dutch company said it now expects fourth-quarter earnings of $2.2 billion, down about 70% from $7.3 billion a year earlier. Full-year earnings are expected to total about $16.8 billion, down from $27.2 billion in 2012. “Our 2013 performance was not what I expect from Shell,” said Mr. van Beurden, who took over as Shell’s CEO just three weeks ago.

The bad news is the latest sign of profit pressure squeezing the world’s largest oil firms, including Shell, Chevron Corp. and Exxon Mobil Corp. All of them invested heavily on remote projects in places like deep water, frozen tundra and mountainous jungles. A surge in development costs and flat oil prices have made it harder to justify the costs of such projects, and the industry’s giants arrived late to the shale boom in North America, overpaying for assets.

Shell, the world’s second-largest publicly traded oil company by output, has been an especially big spender for the past decade. Shell estimated that its net capital-spending costs hit $44.3 billion in 2013, up nearly 50% from 2012.

But some of the company’s investments are struggling. Shell owns a stake in a Kazakh oil field that has cost more than $30 billion and is more than eight years overdue. Shell wrote down by more than $2 billion last year the value of its shale assets in North America. Sea ice and an oil-rig crash hurt an Arctic exploration project after an investment of more than $4 billion.

The New York Times Stanley Reed reported that many investors and analysts were surprised by the news:

“We’re a bit shellshocked this morning after this profit warning, which is highly unusual for an integrated oil company,” analysts at Sanford C. Bernstein in London wrote in a research note.

Analysts had expected $4.9 billion in adjusted earnings for the quarter, according to Bloomberg News. Shell also took a $700 million impairment write-down.

Shell’s shares fell more than 4 percent as markets opened in London, though they recovered some ground and closed the day down 0.9 percent.

Mr. van Beurden, who was head of refining at Shell when he took over the top job at the beginning of the year from Peter Voser, who has retired, seems to have inherited a situation that has grown more difficult since his promotion was announced last year.

Neill Morton, an Investec analyst, wrote in a note that “Shell has broken with its recent custom of disappointing on earnings day. It is now dishing up the bad news ahead of time.”

Mr. van Beurden said that “our focus will be on improving Shell’s financial results” and “achieving capital efficiency.”

Improving the finances is important, but some believe that management should focus on itself, according to a CNBC story:

Ishaq Siddiqi, a market strategist at London-based broker ETX Capital said it was worrying news from an oil major which is clearly suffering from management’s inability to get on top concerns regarding capital discipline.

“This is unlikely to change this year leaving markets worried about the group’s outlook,” he said in a morning note.

“Shell is not an isolated case however, as weak industry conditions for downstream oil are likely to hit sector peers too. For Shell itself, management must now implement more aggressive targets for group strategy in order to turn a page and improve capital efficiency which would go some way in improving operational performance.”

Shell said that a high level of maintenance activity during the last quarter affected high value oil and gas production volumes. A weak Australian dollar also hit earnings. It added that its Upstream Americas unit continued to incur a loss and the security situation for its Nigeria operation continued to remain challenging. Upstream oil operations search for and recover crude oil and natural gas, whilst downstream production processes the materials collected during the upstream stage.

 The New York Times pointed out that it takes years to develop an oil field or other operation and make it profitable:

The company has now reported three straight quarters of disappointing earnings, and it may be tough for a new chief to turn things around quickly. The oil industry is a long-term business and it takes years to develop oil fields and other installations that, which, once completed, usually operate for decades.

The disappointing earnings “won’t just stop because of a new guy” at the helm, said Oswald Clint, an analyst at Sanford C. Bernstein, in an interview by telephone on Friday.

Obviously putting a new CEO in place doesn’t change past performance, but it will determine if the company is able to turn around its recent investments. But in the short-term it looks like van Beurden will have some explaining to do.