Shell's Q3 Profits Slip on Low Prices (Update)

(Adds comments from CFO)

Shell has reported lower profits for the third quarter, in line with a trend that has seen its rivals Total and BP also announce weaker earnings this week as a result of bearish market conditions.

CFO Jennifer Uhl said that the current economic conditions would, if continued, slow down the company's targeted reduction in gearing and its share buy-back campaign, but that it was determined to keep its high credit rating. And she reminded press of the company's strong record in asset divestments, free cash flow growth and cost-cutting.

The company had been assuming in 2016, following its BG purchase, that oil would be $65/b this year and $66/b next. If current conditions continue, the reduction could have an impact of $2.5bn on downstream cashflow and $5.5bn on upstream cashflow, leaving it $8bn out of pocket this year and next. She said GDP trends did not support growth in demand and the weather was benign as well. Chemicals demand, for instance, was down 7% quarter on quarter. But although it would affect the pace, it would not affect the intention, she told press.

Net income attributable to the Anglo-Dutch major's shareholders on a current cost of supplies (CCS) base excluding identified items – used as a proxy for net profit – slumped 15% y/y to $4.77bn in the three-month period, Shell said in a report published October 31. The decline was caused by lower oil and gas prices and slimmed downstream margins but cashflow benefited from two start-ups, one of which was the Prelude LNG project which has now shipped eight cargoes of LNG and some of condensate and LPG.

On the upside, Shell was supported by the "stand-out" performance in the trading of LNG and oil products, which she said might not be repeated. Uhl said that 80% of its LNG was sold on oil-indexed contracts with a lag of three to six months. While the oil price is below Shell's planned $65/barrel, it still generates a higher LNG price than the Japan Korea Marker spot price assessment. The contractual relationships allowed for "significant value," and even if there were to be price reviews in the long-term contracts, these would only shift the base price, not the indexation agreements, she said.

Cash flow from operations, factoring out working capital movements, came to $12.1bn in the period, down from $14.7bn a year earlier.

“This quarter we continued to deliver strong cash flow and earnings, despite sustained lower oil and gas prices, and chemicals margins,” CEO Ben van Beurden said in a statement. “Our earnings reflect the resilience of our market-facing businesses and their ability to capitalise on market conditions, including very strong trading and optimisation results this quarter.”

Like other majors, Shell’s upstream business was stung by low prices, with CCS earnings excluding items from the segment more than halving to $907mn. While production was stable at 3.563mn barrels of oil equivalent/day, Shell suffered a 18% decline in realised prices for liquids and a 15% drop for gas. Its integrated gas segment performed well, with CCS earnings up 17% at$2.67bn, while downstream earnings were up 7% at $2.01bn.

“Our intention to buy back $25bn in shares and reduce net debt remains unchanged,” van Beurden continued. “The prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback program within the 2020 timeframe.”

BP reported a 41% drop in profits for the third quarter, not only due to weaker prices but also output disruptions in the Gulf of Mexico as a result of Hurricane Barry. Profits at Total also fell by 24%, as bearish prices more than offset production gains.