Royal Dutch Shell profits slump, miss forecasts by $1bn

Royal Dutch Shell’s second quarter profits dropped 72% due to lower oil prices and narrower refining margins, though the dividend was held steady despite a stonking 94% fall in earnings.

Failing to match the strong performance of rival BP, Shell posted earnings attributable to shareholders of just $0.2bn compared to the $3.4bn for the same quarter a year ago.

Shell said while earnings benefited from increased production volumes from BG assets since the February acquisition, the figure was so much lower due to the impact of the slump of crude, gas and LNG prices, the step-up in depreciation resulting from the acquisition of BG, weaker refining industry conditions and increased taxation.

Profit adjusted for one-time items and inventory changes sank 72% percent from a year earlier to $1.05bn, missing consensus forecats by around $1bn.

The interim dividend remained at 47 cents.

Strong revenues from integrated gas and downstream divisions more than outweighed a $2bn loss in the upstream division, which was hit by $649m of exceptional charges, even though oil and gas production was up 28% versus a year earlier to 3,508 thousand barrels of oil equivalent a day (kboe/d).

“However," said chief executive Ben van Beurden, "lower oil prices continue to be a significant challenge across the business, particularly in the upstream.”

Oil prices remain at distressed levels as slow global demand remains well short of the global glut.

Van Beurden said the the board was continuing to make major changes to Shell’s working practices and cost structure, cutting underlying operating costs by $0.9bn in the quarter and remaining “firmly on track” to deliver a $40bn cut to annual underlying operating costs by the end of 2016.

“Looking through the cycle, our investment plans and portfolio actions are focused firmly on reshaping Shell into a world-class investment case through stronger, sustained and growing free cash flow per share.”

Organic capital investment is expected to be $29bn for the full year, which compares markedly to a combined $47bn across Shell and BG two years ago.

Analyst Nicholas Hyett at Hargreaves Lansdown said while Shell's cutting the dividend would cause half of Holland to "keel over in apoplectic horror", the company might have no choice.

"Even after dramatic cuts, Shell's spending plans still outstrip its likely cash flows, and with the dividend yield now over 7%, investors seem to be questioning whether the current rate of pay-out can continue.

"For the time being the company is sticking to its previous dividend commitments. Despite around a third being paid in shares rather than cash, earnings cover for the dividend is becoming increasingly sparse. Shell would argue that at current prices, the industry will invest so little that future production will fall, creating a global shortage of oil that will ensure a price recovery. In the meantime, the company seems prepared to let its balance sheet take the strain."

Gearing hit 28.1% at the end of the second quarter versus 12.7% a year earlier, with the increase largely attributable to the BG acquisition.

Hyett added: "But that balance sheet is looking increasingly stressed. Even ignoring working cash changes, free cash from operating activities in the quarter amounted to just $4.8bn. By comparison the cash dividend cost the group around $4.5bn, with capex for the year expected to be around $14.5bn. That means gearing will continue to rise, a process that can only go so far."