Shell issues profit warning: fourth quarter results to disappoint on production, costs woes

Photo: The Canadian Press. All rights reserved.

A car enters a Shell petrol station in Manchester, England, May 15, 2013. THE CANADIAN PRESS/AP, Jon Super

AMSTERDAM - Royal Dutch Shell PLC issued a profit warning for the fourth quarter on Friday, saying results will be worse than most analysts expected due to a mix of lower production, higher costs, and a worse performance by its refining division.

The company gave a provisional net profit figure of $1.8 billion (1.32 billion euros) for the quarter, down from $6.7 billion in the same period of 2012. Full earning figures are not due until Jan. 30.

Shares, which have underperformed most other major oil companies in the past year, fell more than 3 per cent in early trading in Amsterdam, but later recovered somewhat and were down just 1.4 per cent at 25.99 euros.

"Shell has broken with its recent custom of disappointing on earnings day," said Investec analyst Neill Morton in a note. "It is now dishing up the bad news ahead of time."

Chief executive Ben van Beurden said in a statement the results were "not what I expect from Shell."

Van Beurden, a Dutchman, took over the top job from Peter Voser, who is retiring, just two weeks ago. Morton, the analyst, said that bullish investors may think that the profit warning so soon after Van Beurden assumed office is a move to clear the decks of bad news or build support for a new round of cost-cutting, both of which will make the company look better later in his tenure.

"We remain to be convinced," Morton said. He has a "hold" rating on shares.

The company did not release many figures Friday, but it did offer up one number commonly used by analysts to gauge performance: income not including one-time charges and measured on a "current cost of supplies" basis, which also strips out fluctuations in the price of oil in the pipeline. On that measure, earnings would have been $2.9 billion, Shell said, versus $5.6 billion in the same period a year ago.

Then, Shell booked a net $1.7 billion in profits on asset sales, compared with impairment charges of $700 million this time.

In its statement, Shell offered a laundry list of problems at its production arm — which usually accounts for the bulk of its earnings.

The company said it had a "high level of maintenance activity" in the quarter, disproportionately at its most profitable operations, including where it sells gas it has transformed to liquid form.

The company has also suffered frequent shutdowns in Niger's restive river delta due to attacks or vandalism of its pipelines.

In December it said would cancel a $20 billion project to build a facility in Louisiana to convert cheap natural gas to liquids such as diesel and jet fuel. At the time, Voser described that as tough decision made only because the company had more attractive investment opportunities elsewhere.

He used the same argument in July when he booked a $2.1 billion impairment charge on the value of the company's U.S. shale assets and began disposing shale holdings in Colorado, Texas and Kansas.

Shell's attempts to explore for oil offshore in Alaska in the Arctic circle have also taken years longer than expected to get started. That's not so much due to protests from environmental groups, who vigorously oppose the idea, but because of problems with a safety system Shell was required to have in place before commencing drilling.

In all, its American production activities operated at a loss in the fourth quarter, the company said Friday.