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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Shell Disappoints Analysts With Abysmal Earnings Report

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Royal Dutch Shell disappointed with its second quarter earnings, reporting numbers much lower than what analysts had expected.

Shell’s profits fell by 72 percent, dropping to $1.05 billion, down from $3.76 billion in the second quarter of 2015. The numbers are the worst quarterly earnings in 11 years. They also missed expectations by a large margin – analysts had predicted earnings of $2.16 billion.

“This is a very big surprise from Shell,” Brendan Warn, a managing director at BMO Capital Markets, told Bloomberg in an interview. “Things are not looking up in the third quarter either, with weakness in the industry’s refining environment and Shell’s oil production still under pressure.”

The second quarter also reflected the first full quarter of the BG Group takeover, which did not rescue the company from poor market conditions. BG helped increase Shell’s oil and gas production by 28 percent to 3.508 million barrels of oil equivalent per day (mboe/d), but that figure also missed market expectations – analysts’ estimates pegged output at 3.63 mboe/d. Shell’s CEO Ben van Beurden stressed that the synergies from the merger will take a few more years.

Low oil prices “continue to be a significant challenge across the business,” van Beurden said. Shell’s upstream unit had a particularly poor showing, losing $1.325 billion for the quarter. That was offset by $1.816 billion in downstream earnings, plus $868 million in profits from its integrated gas unit, which includes LNG. Shell’s $54 billion purchase of BG Group was a massive bet on LNG – giving it a 20 percent share of the entire global LNG trade – so Shell needs its integrated gas earnings to rise in the years ahead. The worrying problem for Shell is that the purchase was expensive and ill-timed. LNG markets are in the dumps, with prices crashing because of oversupply. It could take several years for the LNG supply glut to clear, a process that will likely be more drawn-out than for crude oil. But Shell insists that the bet on LNG is a long-term proposition. Related: The Biggest Threat To Oil Prices Is The Dollar, Not A Supply Glut

Like its peers, Shell is maintaining its dividend, keeping it steady at 47 cents per share. Although Shell insists on the durability of its shareholder payouts, the company’s debt continues to rise. Shell’s debt ratio has climbed to 28.1 percent, up from 12.7 percent a year ago – although much of that also has to do with the BG purchase.

Shell has a few ways to improve its balance sheet, including spending cuts and asset disposals. The merged Shell-BG company now expects to spend $29 billion this year, which is sharply lower than the $47 billion that Shell and BG spent combined in 2014.

Shell also has plans to dispose of $30 billion in assets over the next few years, an ambitious disposal campaign that could prove difficult to achieve. Shell admitted in June that it could take longer than previously expected to unload such a high volume of assets, especially since so many other companies are looking to do the same. Shell only sold $1.4 billion in assets in the first half of the year, so it will need to step up the pace of disposals if it is to reach its goal of selling $30 billion by 2018. Related: Is This The Beginning Of The End For Venezuela's Oil Sector?

Second quarter earnings for the oil majors will likely be remembered not just for the very poor upstream numbers, but also for a quarter in which refining no longer provided the profitable buffer that it once did. The downstream sector has overproduced refined products, which has led to a sharp buildup in refined product inventories, a trend that is largely responsible for the budding bear market for crude oil. As a result of the glut, refining margins have shrunk substantially, falling from $20.0 per barrel in the third quarter of 2015, down to just $13.8 per barrel in the second quarter of 2016. That had a predictable impact on Shell’s downstream earnings, which fell nearly 40 percent in the second quarter from a year earlier, dropping from $2.9 billion to $1.8 billion.

Meanwhile, French oil giant Total also reported a decline in profits on Thursday, with adjusted net income falling 30 percent to $2.2 billion. Both upstream and downstream units saw a deterioration in earnings, falling 28 percent and 25 percent, respectively. But, unlike Shell, Total beat expectations – analysts’ estimates projected profits of $1.89 billion.

Unfortunately for the oil majors, the oil markets have taken a turn for the worse. Crude prices are down nearly 20 percent from the June highs of $52 per barrel, and the recent string of bearish data, particularly high inventory numbers, leaves few reasons for the oil industry to feel optimistic. Oil prices are at a three-month low and closing in on the $40 per barrel range.

By Nick Cunningham of Oilprice.com

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