Shell: yet to feel full impact of oil price drop, blames lack of demand as much as oversupply

AMSTERDAM – Shell, Europe’s largest oil producer, reported a dip in third quarter profit on Thursday, but said it has yet to feel the full impact of the recent slide in oil prices.

As the company reported a 4.5 per cent dip in third-quarter net profit, to $4.46 billion, Chief Financial Officer Simon Henry warned that the period’s figures reflect only a third of the oil price’s slide from above $100 per barrel this summer to around $81 per barrel.

Henry said that every $10 fall in the price of oil per barrel will shave $3 billion off Shell’s annual earnings.

Shell’s investment strategy is based on prices remaining between $70 and $110, Henry said, with $70 representing what Shell sees as a likely bottom for prices.

Explanations of the price fall have focused too much on supply issues, Henry said, notably booming production from U.S. shale fields.

“More important is demand,” Henry said. “Demand is weaker in emerging markets, which account for all of the growth in demand” given that mature economies’ oil use is expected to remain flat or decline.

When stripping out the impact of fluctuations in the price of oil, earnings rose 24 per cent to $5.27 billion, Royal Dutch Shell PLC said. That measure of earnings, called “current cost of supplies”, or CCS, is favoured by the industry to gauge underlying profitability of operations. Shell said the performance reflects higher margins at both its production and refining operations.

Goldman Sachs analyst Michele della Vigna said the earnings were better than expected.

“Overall this is a good set of results, consistent with a reporting season for the European big oils (oil companies) that has mostly surprised to the upside,” della Vigna said in a note to clients.

Shares fell 1.1 per cent to 27. 94 euros ($35.18) in Amsterdam in a lower market.

Chief Executive Ben van Beurden said the company is trying to “keep a tight hold on costs and spending, and improve the balance between growth and returns.”

Since becoming CEO this year, Van Beurden has slashed investment spending. Net capital investment in the quarter was $4.8 billion, compared with $9.4 billion a year ago.

Shell’s production arm reported CCS profit excluding one-time charges of $4.34 billion, a 25 per cent increase, which Shell said was due to high-margin oil projects coming on line. However, actual production fell by 5 per cent to 2.79 million barrels per day, which Shell attributed in part to an expired license in Abu Dhabi and to capacity in Nigeria that has been temporarily shut due to safety concerns.

Henry forecast production will continue to decline in the short to medium term, due to asset sales.

The company said at its downstream arm, which includes refining, saw a doubling in CCS profit excluding charges to $1.79 billion on better margins.

Separately Thursday, the company named former DuPont Chief Executive Charles Holliday to become chairman of the board in 2015.

Holliday, who has written a book on sustainable business development, will replace outgoing chairman Jorma Ollila if approved at the shareholders’ annual meeting next year.