Royal Dutch Shell may be swimming in black gold, but this morning its P&L was positively smothered in red ink. The oil major reported a $6.1bn (£4bn) loss for the quarter to the end of September, a staggering fall from last year’s $5.3bn profit.
The immediate cause of Shell’s woes is an $8.6bn impairment as a result of the depressed oil price, more than half of which came as a result of the firm quitting its Arctic exploration near Alaska and its Carmon Creek thermal oil sands project in northern Alberta. Who’d have thought strip mining vast swathes of frozen tundra could be so expensive, eh?
Write downs are always going to be painful when you’re in a commodity business that has $344bn in assets on its balance sheet, however, and they were to be expected. The deeper worry is clearly the the oil price war itself, and specifically how long Opec sheikhs will struggle to put upstart American frackers out of business by keeping supply artificially high even as Chinese demand wavers.
Oil remains at a bargain basement $50 a barrel and the industry seems to have accepted it won’t get much above $60 for at least a year. That’s hitting bottom lines even without write downs. Shell’s profits before the impairment were still down 70% (to $1.8bn), off revenues falling 37% (to $69.2bn).
All these (very large) negative movements disguise how ably Shell’s chief executive Ben van Beurden is handling the sector’s downswing, however. The company cut capital expenditure by $1.4bn compared to the same period last year, and has agreed sales of businesses or stakes in joint ventures in the US, China, Japan and Norway. All this has helped to keep its debt levels safely low, while enabling it to maintain its dividend for the year.
Van Beurden said the closures in Canada and Alaska were 'difficult, but impactful decisions’, but he is ‘determined that Shell will become a more focused and competitive company as a result’.
The £47bn takeover of BG announced earlier this year, meanwhile, remains on track for completion early in 2016 and will be a ‘springboard to focus Shell into fewer and more profitable themes, especially deep water and integrated gas’.
Nothing like 'themes' for making the most of a bad situation, eh. Whether Shell will be able to shrug off the slump and emerge stronger once the oil price rises again remains to be seen, but investors don’t seem too distressed by today’s news. Shell shares fell a modest 2.1% to 1,405p in mid-morning trading – though they are still a third down since August last year.