Shell cuts 2016 spending to $30b as profit tumbles

By The Rainbow

Royal Dutch Shell has drastically reduced its capital spending for 2016 to $30 billion, even as it recorded $4billion profit, but an 83 per cent drop in its earnings for the first quarter of 2016.

Shell, and other oil multinationals are currently facing tough times due to low crude prices, but its Chief Executive Officer, Ben van Beurden, said its downstream and integrated gas businesses remain its area of strength.

The results were the first Shell has posted since its acquisition of BG Group in February 2016 but it said the impact of the acquisition on the result was immaterial.

Shell's earnings on a current cost of supplies (CCS) dropped by $4 billion to $800 million down from $4.8 billion in the first quarter of 2015.

Beurden said: “Shell's integrated activities differentiate us, with our Downstream and Integrated Gas businesses delivering strong results and underpinning our financial performance despite continued low oil and gas prices.

“We continue to reduce our spending levels, to capture cost opportunities and manage the financial framework in today's lower oil price environment. The combination with BG is off to a strong start, as a result of detailed forward planning before the completion of the transaction. This will likely result in accelerated delivery of the synergies from the acquisition, and at a lower cost than we originally set out.

“Putting all of this together, capital investment in 2016 is clearly trending toward $30 billion, compared to previous guidance of $33 billion, and some 36 per cent lower than combined Shell and BG investment in 2014.

According to him, yearly operating expenses excluding identified items are trending towards a run rate of $40 billion compared with 2014 combined spend of around $53 billion.

In practice, he said, “we expect to absorb BG's capital investment and operating expenses during 2016, with no net increase overall, compared with Shell stand alone in 2015.

“We will continue to manage spend, through dynamic decision-making across the organisation, taking advantage of opportunities from both the deflating market and the two companies coming together.

“The completion of the BG deal has reinforced our strategy and strength against the backdrop of hugely challenging times for our industry. For Shell and our shareholders, this is a unique opportunity to reshape and simplify the company,” he said.

It statement showed that the first quarter 2016 CCS earnings attributable to shareholders excluding identified items were $1.6 billion compared with $3.7 billion for the first quarter 2015, a decrease of 58 per cent.

Compared with the first quarter 2015, CCS earnings attributable to shareholders excluding identified items were impacted by the decline in oil, gas and LNG prices and weaker refining industry conditions. Earnings benefited from lower operating expenses, as steps taken by Shell to reduce costs more than offset the increase in operating expenses associated with BG.

It also noted that the first quarter 2016 basic CCS earnings per share excluding identified items decreased by 63 per cent versus the first quarter 2015.

Cash flow from operating activities for the first quarter 2016 was $0.7 billion, which included negative working capital movements of $3.9 billion.