Shell profit warning after disappointing Q4 2013

Anglo-Dutch Oil Giant, Royal Dutch Shell, the world’s second-biggest publicly traded oil company, shocked market analysts after issuing a profit warning, saying it has had a disappointing fourth quarter.

The company stated that fourth-quarter 2013 figures are “significantly lower than recent levels of profitability, considering current oil and gas prices and the downstream oil products industry environment.”

According to Shell, Q4 2013 profits, which will be published on January 30th, are expected to be approximately $2.2 billion, and $18.8 billion for the whole of 2013, a significant drop compared to 2012’s $27.2 billion.

In an online communique, Shell explained that falling revenues were mainly due to weak industry conditions in downstream oil products, significantly more costly exploration expenses, as well as lower upstream volumes.

Ben van Beurden, who took over from Peter Voser at the beginning of this year as Shell’s Chief Executive Officer, said:

“Our 2013 performance was not what I expect from Shell. Our focus will be on improving Shell’s financial results, achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery.”

Included in the company’s higher costs for 2013, were security issues in Nigeria and maintenance work that lowered oil and gas production. The fall in value of the Australian dollar also had an impact on revenue, the company added.

Shell – four successive disappointing quarters

The last four quarters have produced disappointing results. In 2013, Shell started selling of some of its interests in the US shale gas industry, and has recently announced plans to sell off some North Sea oilfield investments as well.

A $20 billion project to construct a gas-processing plant in Louisiana was cancelled last month.

Shell’s net-capital spending reached $44.3 billion in 2013, almost 50% more than in 2012.

Shell is not the only oil giant to experience a profit squeeze. Chevron and Exxon Mobil, which like Shell invested in remote projects, have been haunted by a massive increase in development costs combined with flat oil prices. The companies also entered the US shale boom too late and paid dearly for assets.

Some of Shell’s investments have cost the company dearly

  • Kazakh oil field – cost the company over $30 billion and is so far 8 years overdue.
  • Shale assets in North America – in 2013, $2 billion were written down. Shell also abandoned a Rocky Mountains project in 2010 after spending billions.
  • Arctic exploration project – after investing over $4 billion, an oil-rig crash and sea ice undermined the whole project.

Shell’s director of projects and technology, Matthias Bichsel, in an interview with the Wall Street Journal said “Failures are a hazard of Shell’s technology-heavy strategy. This is how we’ve pushed the envelope. We’ve tried, and it doesn’t always work, but we have to be doing it.”

In an article in Forbes Christopher Helman believes the largest single hit to Shell’s earnings in Q4 2013 was the “$700 million asset impairment charge believed to be tied to Shell’s lackluster exploration venture in the Eagle Ford shale of Texas.”