Shell profit drops 72% on lower oil, weaker refining margins

[LONDON] Royal Dutch Shell Plc reported a 72 per cent decline in second-quarter earnings, missing estimates as lower crude prices continued to hurt income while refining margins narrowed.

Profit adjusted for one-time items and inventory changes fell to US$1.05 billion from US$3.8 billion a year earlier, Europe's biggest oil company said Thursday. Analysts had expected a US$2.16 billion profit, according to the average of 12 estimates compiled by Bloomberg.

Chief executive officer Ben Van Beurden, who earlier this year completed Shell's record acquisition of BG Group Plc, is focusing on boosting production and lowering costs to drive earnings.

Brent crude's 25 per cent increase during the quarter provided some prospect of relief to oil companies after a two-year slump forced project delays and job cuts. Yet the subsequent price dip shows the recovery is likely to be lengthy.

"Lower oil prices continue to be a significant challenge across the business, particularly in the upstream," Mr Van Beurden said in a statement. Second-quarter production was 3.51 million barrels of oil equivalent a day, compared with analyst estimates for 3.63 million.

Shell's loss from oil and gas production widened to US$1.3 billion in the quarter from US$469 million a year earlier. Profit from downstream, which includes refining, dropped 39 per cent to US$1.8 billion while earnings from integrated gas, which includes liquefied natural gas, fell 38 per cent to US$868 million.

Shell plans to spend US$25 billion to US$30 billion a year through 2020, though Mr Van Beurden has said the Anglo-Dutch company has the option to cut expenditure further and defer more projects if oil prices stay below US$50 a barrel. Brent traded below US$44 on Thursday.

The Benchmark crude averaged US$47.03 in the second quarter, compared with US$63.50 a year earlier and US$35.21 in the first quarter of this year.

Shell completed the acquisition of BG for US$54 billion on February 15. The purchase gave it a 20 per cent share of the global liquefied natural gas market with production facilities from Australia to the US, as well as high-margin oil fields in Brazil.

Shell's B shares in London, the most widely traded, have increased 37 per cent since the deal was completed. BP Plc has risen 30 per cent in the period and Total SA 11 per cent.

BP reported a 45 per cent decline in profit on July 26, while Total posted a 30 per cent drop in earnings on Thursday. Exxon Mobil Corp, the world's biggest oil company by market value, and Chevron Corp will announce their results on Friday.

The biggest oil producers also run refineries, which have benefited from low crude prices over the past two years and provided a safety net as earnings from exploration and production dwindled.

Global refining margins averaged US$13.80 a barrel in the quarter through June compared with US$10.50 in the preceding three months, according to BP. The margin has shrunk to US$10.70 a barrel this month as demand growth slows and inventories build.

At the same time, crude's rally is fading. Production shuttered by wildfires in Canada and by militant attacks in Nigeria is returning, and shale drillers in the US are bringing back some rigs.

While there's consensus among analysts that the worst of the oil glut is over, the International Energy Agency cautioned this month that "the road ahead is far from smooth."

BLOOMBERG