29 October 2015, London — Royal Dutch Shell PLC on Thursday swung to a third-quarter loss after taking chunky write-downs on projects amid a 16-month slump in oil prices.
The giant Anglo-Dutch oil company took charges of $7.9 billion in the quarter after scrapping a number of big ticket projects. The hefty figure included $2.6 billion related to the company’s decision to abandon its exploration project in the Alaskan Arctic after drilling its costliest dry hole ever and $2 billion for scrapping a major oil sands project in Canada. It also reflected impairment charges of $3.7 billion, reflecting a weaker long-term oil and gas price outlook and mostly relating to North American shale gas properties.
The price of international benchmark Brent crude averaged around $50 a barrel in the third quarter, the lowest level since the financial crisis and roughly half its level in the same period last year.
Shell’s quarterly loss on a current cost-of-supplies basis—a number similar to the net income that U.S. oil companies report—was $6.1 billion down from a profit of $5.3 billion a year earlier. Stripping out its impairments and write offs, Shell reported a profit of $1.8 billion, down 70% compared with a year earlier
“While our cash flow and our operating performance in the quarter were strong, the headline numbers we’re reporting today include substantial impairments and well write-offs,” Chief Executive Ben van Beurden said. “These reflect both a lower oil and gas price outlook and the firm steps we are taking to review and reduce Shell’s longer-term option set.”
Shell has gained a reputation this year as one of the more optimistic companies among the oil majors on the future direction of oil prices, but its decision this year to scrap major projects is a stark reflection of the challenges ahead.
The company’s upstream business, which focuses on finding and producing oil and gas, reported a loss of $425 million in the third quarter compared with a $4.3 billion profit a year earlier. Reduced costs and a 3% increase in production volumes weren’t enough to offset the impact of weaker prices, the company’s sizable write downs and a higher tax bill.
On the other hand, the company’s marketing and refining business experienced another strong quarter, though that wasn’t sufficient to cushion the impact of its sizable impairments and write-offs. Downstream profits rose 55% compared with a year earlier to $2.48 billion, helped by strong refining margins during the third quarter.
The company’s sizable loss in the third quarter comes as Shell moves ahead with its $70 billion acquisition of BG Group, which is expected to complete early next year. The deal remains a “springboard to focus Shell into fewer and more profitable themes, especially deep water and integrated gas,” Mr. van Beurden said.
*Sarah Kent – WSJ