Shell Q4 Earnings: Low Price Realizations Hurt 2015 Earnings, Company Focuses On Reducing Spending
Royal Dutch Shell Plc. (NYSE:RDSA) released its 2015 fourth quarter and full year earnings report recently. [1] The low crude oil price environment continues to weigh significantly on the company’s upstream operations. We do not expect any significant price recovery in the near term and believe that Royal Dutch Shell will continue to operate in a challenging environment for the next few quarters. The decline in global crude oil prices has forced the company to increase its focus on optimizing capital spending and operational costs in order to stay afloat in the current commodity down cycle. Resultantly, Royal Dutch Shell cut back on its capital and operational spending significantly in 2015, and will continue to do so throughout 2016. The company management also talked about the Shell-BG Group Plc. (LON:BG) merger, expressing confidence that the merger will be completed by February 15. [2]
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Weak Price Realizations Batter Upstream Earnings
Depressed oil prices had a significant impact on Royal Dutch Shell’s upstream earnings last year. The company’s average liquids price realized per barrel for the year 2015 were 48% lower than in 2014. [1] According to Royal Dutch Shell’s latest earnings call presentation, a decline of $10 per barrel in Brent crude oil prices translates into a loss of $3.3 billion in earnings on an annual basis. [3] Natural Gas realizations did not fare any better for Royal Dutch Shell last year, experiencing a 27% decline. Resultantly, the company’s 2015 full year upstream earnings excluding identified items fell 89% y-o-y, with the loss due to realizations emerging as the single largest contributor to the massive decline. The abundant supply of oil coupled with slower demand growth essentially means that the low energy price environment will continue to persist in the near term, which will add to Royal Dutch Shell’s troubles. The company’s cash flows from operations amounted to $29.8 billion in 2015, which were not enough to cover cash outflows (Cash used in investing activities + Cash dividend and buyback) of more than $32 billion. [3]
Royal Dutch Shell Annual Reporting
Shell Focuses On Reducing Spending And Asset Sales
Cash outflows exceeding cash from operations has been a common occurrence in all 4 earnings updates for integrated oil majors covered by Trefis so far – Royal Dutch Shell, Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and BP Plc. (NYSE:BP). In the wake of outflows exceeding inflows, Royal Dutch Shell has made a conscious effort to optimize both capital and operational costs in order to maximize its return in the current commodity down cycle. The company spent $37.3 billion on capital investment in 2014. However, capital investment for the full year 2015 decreased by $8.4 billion and amounted to $28.9 billion. [1] Royal Dutch Shell also reduced last year’s operating costs by $4 billion. The company plans to continue reducing its expenditures during the near term, and aims to slash this year’s capital investment and operating costs by $3 billion each. Additionally, Royal Dutch Shell is actively seeking to divest its non-core assets. The company had earlier announced plans to raise $50 billion from asset sales between 2014 and 2018 in order to ride out the commodity downturn and also finance its takeover of BG Group. [4] Royal Dutch Shell has completed $20 billion worth of divestments through the end of 2015, and plans to divest $30 billion more by 2018.
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Notes:- Quarterly Results Announcement, February 4, 2016, Royal Dutch Shell Investor Relations [↩] [↩] [↩]
- Royal Dutch Shell Plc (RDS.A) Ben van Beurden on Q4 2015 Results – Earnings Call Transcript, February 4, 2016, Seeking Alpha [↩]
- Webcast presentation slides, February 4, 2016, Royal Dutch Shell Investor Relations [↩] [↩]
- With no sign of oil price rebound, Shell wields axe again, July 30, 2015, Reuters [↩]