Cautious Outlook Prevails at Shell as 2009 Earnings Come in 69% Down

Shell has reported a fairly disappointing set of fourth-quarter and full-year results, despite making nearly US$2 billion in cost savings last year, blaming the economic downturn and poor demand, as well as the low refining margins cited by all the majors to report so far. The Anglo-Dutch major reported a 74% fall in earnings on a current cost of supplies (CCS) basis in the fourth quarter, to US$1.18 billion, and a 69% fall in year-on-year terms to US$9.8 billion. Other companies in its peer group have also seen double-digit annual declines on the back of low refining margins and lower oil and gas prices, but to a lesser extent set against previous performance, with profits down 56% at Chevron to US$10.48 billion, 67% at ConocoPhillips to US$5.37 billion, 56% at ExxonMobil to US$19.4 billion, and 45% at BP to US$13.96 billion, all on differing reporting bases to Shell.

Shell's operational results were also lacklustre, given previous advice of average annual increases in the range of 2–3%. Instead, oil and gas production fell 3% on the year to 3.152 million boe/d, which included falls of 4% for liquids in the fourth quarter to 1.7 million b/d and 1% for gas to 9,452 mmcf/d. LNG sales were a brighter spot, increasing 3% for the year and a significant 18% in the last quarter to 3.96 million tonnes, helped by ramp-ups at Sakhalin II and Train 5 at the Northwest Shelf in Australia, which were partly offset by lower volumes from Nigeria, where sabotage at onshore infrastructure has reduced gas feedstock to the NLNG plant for much of the year.

Field maturity was responsible for some of the production declines, although Shell has had some successes in stabilising and raising production in Oman, which was long a factor in decline rates. Ramp-ups to plateau were also achieved at Norway's Ormen Lange and Sakhalin. The company cited OPEC restraint as another issue affecting output—although Nigeria security again looks to have been one of the key factors outside maturity, despite the drop in violence through the fourth quarter. In this regard, Shell has recently sold shares in three onshore licences that have not been in production since 2008, amidst rumours that it is looking to reduce its onshore footprint decisively and public statements that it no longer sees Nigeria as a growth area.

Next Steps

Shell's full-year presentation—as with other recent announcements—was heavy on what it intends to do to secure long-term growth. Organic production growth for 2010–11 is already seemingly in hand from projects in Qatar in particular, which will bring onstream over 350,000 boe/d, or more than 10% of current net production towards the year's end. Qatar is also boosting Shell's LNG sales, with the next major increment then expected from Gorgon LNG in Australia, which is due from 2014–15.

Meanwhile, the downstream segment will see further reorientation towards larger-focused complex projects and away from smaller sites, with US$1.2 billion of divestments recorded in 2009, and plans in hand for the closure of the 130,000-b/d Montreal East refinery in Canada. A further 566,000 b/d of refining capacity is under review, including operations in the United Kingdom, Germany, Sweden, and New Zealand—equivalent to some 15% of Shell's capacity. Downstream will also be the main focus of some 1,000 job losses and US$1 billion in savings planned in 2010, following 5,000 job losses across the company in 2009 as part of its "Transition 2009" programme, and US$2 billion in cost savings, of which a startling US$1 billion were in the last quarter alone.

Longer term, recent finds in the United States and Australia are expected to offer new upstream growth prospects, fitting also within Shell's reorientation towards Organisation for Economic Co-operation and Development (OECD) host countries, albeit with Iraq also offering another major target growth area, after Shell won the technical service contract for Majnoon and a share in the West Qurna 1 consortium, following its success on the Southern gas gathering contract, although this remains to be signed off as yet.

Outlook and Implications

Shell is still waiting for the impacts of its major capital expenditure programme to feed through into its production and long-term outlook, although the sense is that this is always just around the corner, heavily dependent on the company keeping a steady hand on existing upstream operations, both in terms of reining back shut-ins and managing maturity, as well as bringing onstream its handsome project pipeline. The company hopes to bolster the impact of the long-awaited production boost with further structural changes to cut costs and reduce exposure to low margins in refining, which will bear the brunt of a further 1,000 job losses in 2010, following the 5,000 losses in 2009. This drive will reduce the number and scope of operations in which Shell is involved, with a refocus on quality and complexity, rather than geographical and operational reach. This refocusing will undoubtedly take time to feed through into the balance sheet, although after yet another appeal to "uncertainty" and challenging times there is a sense the company has to do more to match peers, most of whom are going through similar processes and reorientation, but with apparently greater near-term success than at Shell.

Related Articles

• World: 2 February 2010: BP Posts 68% Y/Y Increase in Q4 Profits Despite Weaker-than-Expected Refining Results
• World: 2 February 2010: ExxonMobil's Annual Profit Record Clouded by 33% Decline in Q4 Earnings
• World: 1 February 2010: Downstream Woes Continue as Chevron Posts Q4 Results
• World: 28 January 2010: ConocoPhillips Reports Q4 Earnings of US$1.2 bil.
• World: 29 October 2009: Shell Follows Trend with Significant Q3 Losses; Production Steady

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