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Shell profits plunge on Arctic drilling retreat and Canadian write-offs

October 29, 2015

Shell has revealed the $8bn (£5.2bn) cost of scrapping Arctic drilling, abandoning a huge Canadian tar sands project and preparing itself for continued low oil prices.

The charges, which sent the company to a quarterly loss of $7.4bn, included a $2.6bn write-off for withdrawal from the Alaskan Arctic and an additional $2bn charge on the Carmon Creek oil sands project in Canada, where the company suspended building on Tuesday.

It also reflected other impairment charges triggered by the downward revision of the long-term oil and gas price outlook, Shell said. Oil prices have fallen from a peak of more than $115 a barrel last year to less than $49 on Thursday. “In headline terms, this was a challenging quarter,” said Shell’s chief financial officer, Simon Henry.

The costs came as underlying earnings fell by 70% to $1.8bn. The position would have been worse had it not been for a robust performance from the “downstream” refining and marketing business. Lower prices and reduced costs saw earnings here grow to $2.6bn from $1.8bn a year ago.

But the company’s £47bn acquisition of BG Group remains on track for completion early next year. Henry stressed the importance of the takeover. “The deal is a springboard from which we will focus on fewer and more profitable themes, especially deep water and integrated gas,” he said.

It was estimated that the Carmon Creek thermal oil sands project would contribute 80,000 barrels of oil equivalent a day when it was originally sanctioned in October 2013, but it was postponed earlier this year. After a review, Shell concluded that the project no longer justified its position in the group portfolio.

Shell abandoned drilling in Alaska last month after $7bn of spending ended with a well that failed to find hydrocarbons. At the same time, environmental activists argued that industrial activity would hurt fragile ecosystems and marine mammals. They insisted the icy Arctic waters could not be cleaned in the event of a spill.

Henry said: “It was a challenging quarter, but the underlying performance does give us confidence that we will be able to capture the significant value, which is available in the BG combination.”

The dividend is maintained at 47 cents per share and the company suggests the payment to shareholders can be maintained with an oil price of about $60 dollars a barrel.

The refining and marketing business provided strength for Shell’s cash flow. This meant net investments and dividends were covered by operating cash flow over the past year, when oil prices have averaged $60 a barrel. Cash flow from operating activities for the third quarter was $11.2bn. That is a relatively modest reduction when compared with the $12.8bn recorded in the same quarter last year.

Shell’s share price fell by more than 2%, down 36p to 1,706p.

The company was not alone in recording the impact of a lower oil price regime, with Eni of Italy and Total of France reporting profit falls.

The scale of the writedowns surprised some analysts, but they took comfort from the progress Shell was making to balance cash flow with spending and its ability to maintain the dividend.

“Getting out of previous strategic missteps (Alaska, shale, more oil sands) via the impairments is a necessary evil,” said Oswald Clint, an analyst at Sanford C Bernstein in London.

Source: The Guardian

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