Shell profits fall on lower oil price (kind of)

Despite a weaker Q4, oil giant Shell still booked the highest annual profit in European corporate history...

Last Updated: 31 Aug 2010

Royal Dutch Shell (as it’s known to its Mum) said today that profits dipped sharply in the last quarter of 2008, as the falling oil price ate into its margins. Net profits were $4.8bn, 28% down on the same period last year and 56% lower than the previous quarter. But don't go feeling too sorry for the Anglo-Dutch oil giant: on a like-for-like basis, it still recorded a full-year profit of $31.4bn, which is 14% up on 2007 and the highest ever recorded by a European corporate. So last year was, overall, still very much a barrel of laughs...

Life clearly got a bit tougher for oil companies towards the back end of last year as the slowdown in the global economy stifled demand, dragging the oil price down from its summer highs: apparently the cost of a barrel averaged $57.60 during the quarter, compared to $111 in the previous three months. So it’s not really any surprise that Shell saw its profits slide – although this quarterly profit figure (calculated on a ‘current cost of supply’ basis, which adjusts for inventory cost increases to give a more comparable figure) was still ahead of the City’s expectations.

The key for Shell, of course (as with all the oil majors) is to keep pumping the black gold out of the ground. And in this sense, last year’s picture was a bit mixed. Overall production was slightly down on last year (although Shell insists it was broadly flat if you strip out all the distorting factors), with profits sliding 24% to $3.7bn in this part of the business thanks to the falling oil price, the autumn hurricanes in the US, and higher exploration costs. Although the record summer prices helped it to boost profits by 38% for the year as a whole, this will be a cause for concern, particularly at a time when its refining margins are shrinking.

That’s presumably why Shell has promised to keep investing heavily, as it looks to find new energy sources: net capital spending for 2009 is likely to be in the same ballpark as last year’s hefty $32bn total. Given that it’s also boosting its dividend by 11% (shelling out a total of $2.7bn during the quarter), and continues to outperform the rest of the FTSE 100 by some distance, we can’t see too many shareholders complaining. In fact, it's ironic that CEO Jeroen van der Veer is leaving in June, given that he’s one of the few corporate bosses who won’t be feeling the heat at the moment...

Shell was all too eager to trumpet its fall in profits this morning - presumably to manage expectations about the coming year (when profits are likely to be lower), and also to try and avoid too many 'fat cat'/ 'snouts in the trough'/ 'profiteering at our expense' style tabloid headlines. But the fact remains that most FTSE bosses would sell their grandmother for numbers like these at any time, let alone in the current climate...

In today's bulletin:

Shell profits fall on lower oil price (kind of)
Davos Day One: Reasons for cheer despite the long faces
Nintendo and Sony suffer in the Land of the Rising Yen
Bank lending: not ending?
Editor's blog: Sky's no limit

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