As BG Vote Looms, Shell Warns Of Big Hit To Profits

Royal Dutch Shell said Wednesday that it expects its fourth-quarter profits in 2015 to be roughly half what they were in the same period of 2014 due to the steady plunge in the price of oil. The warning comes a week before the Anglo-Dutch company’s shareholders vote on whether to proceed with its proposed merger with the British oil and gas giant BG Group.

Shell said its profit for the final quarter of 2015 would drop to between $1.6 billion and $1.9 billion, excluding one-time charges and changes in inventories. The company enjoyed a profit of around $3.3 billion in the same period a year earlier.

For all of 2015, it said, the profit is expected to range between $10.4 billion and $10.7 billion, again sharply down from its profit of about $22.6 billion in all of 2014. The company’s final report on profits will be issued Feb. 4.

Last year was difficult for the oil industry, even for a giant like Shell, which has a reputation for being adept at dealing with adversity, and 2016 promises to be no better. The company, based in The Hague, confronted the oil-price plunge in 2015 by cutting its capital expenditures by about 20 percent, eliminating about 10,000 jobs and reducing operating costs by $4 billion, or about 10 percent.

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Shell was even forced to abandon energy exploration ventures in Canada and the Arctic Ocean, which turned out to be fruitless, and has been forced to sell various assets to raise $20 billion.

In 2016 it faces even more challenges, as Brent crude dropped just below $30 per barrel this week and Iran is ramping up its own oil production, adding to the global oil glut, now that it is free from Western sanctions that have crippled its energy industry.

Nevertheless, Shell CEO Ben van Beurden remains optimistic, particularly because he sees a merger with BG, a leader in liquefied natural gas (LNG), as a move that will set his company apart from others struggling in a difficult market. “I’m pleased with Shell’s operating performance in 2015, and the momentum in the company to reduce costs and to improve competitiveness,” he said in a statement.

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“Bold, strategic moves shape our industry,” van Beurden said. “The completion of the BG transaction, which we are expecting in a matter of weeks, will mark the start of a new chapter in Shell to rejuvenate the company and improve shareholder returns.”

When Shell announced its proposed purchase of BG in April, at a cost of $69.6 billion, it said the merger would create the world’s largest LNG company and eliminate redundant expenses for both companies. This was widely seen as an example of Shell’s ability to cope with market challenges.

At the time, the deal was seen as a harbinger of additional mergers in which strong companies remained strong in the face of low energy prices by buying up smaller competitors. But such mergers haven’t materialized and Shell’s move doesn’t look so canny anymore because the value of its offer to buy BG has fallen from $69.6 billion in April to about $53 billion by the end of 2015.

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Shell shareholders will vote on the proposed merger with BG on Jan. 27, and BG’s shareholders will decide the next day. The outcome is anyone’s guess, but one analyst, Richard Griffith of the investment bank Canaccord Genuity Ltd., says he believes a merger makes sense.

“The surprise is the how strong the integrated gas business has been,” Griffith told Bloomberg. “That’s a point Shell wants to make because the BG deal is the combination of two powerful gas companies.”

In fact, two of Shell’s largest shareholders, Aberdeen Asset Management Plc and Invesco Asset Management Ltd., support the merger. Invesco fund manager Martin Walker said he believed a combined Shell-BG would lead to strong growth in gas production in the coming years.

Only one Shell shareholder has publicly voiced its opposition to a merger. That is Standard Life Investments, which says the deal, if approved, would be “value destructive.”

By Andy Tully of Oilprice.com

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