LONDON – Within the latest manifestation of industry damage in the plummeting cost of oil, Royal Dutch Shell said Wednesday it expected its profit for the fourth quarter of 2015 to become about half of the items it had been in the comparable period last year.
Shell issued the preliminary estimates before a much-anticipated vote through the company’s shareholders next week around the proposed acquisition of the BG Group, an oil and gas producer. Investors have been skeptical about the BG deal, which was announced in April, when gas and oil prices were much higher.
Still, many analysts expect Shell shareholders to approve the deal in the meeting in a few days. As well as on Wednesday, one large investor in Shell, Norway’s US$790 billion sovereign wealth fund, said that it would vote in favour of the deal.
BG also released preliminary results Wednesday, predicting that it is full-year earnings for 2015 would come in more than 57 per cent underneath the previous year’s profits.
Shell estimated that its profit for that quarter, excluding inventory changes and one-time charges, would fall between 42 per cent and 51 percent, to between US$1.6 billion and US$1.9 billion. The company posted profit of about US$3.3 billion within the fourth quarter of 2014.
Shell, which is based in The Hague, estimated that profit its 2015 would be between US$10.4 billion and US$10.7 billion, sharply down from about US$22.6 billion in 2014.
BG, which is located in Reading, England, also released preliminary figures Wednesday, stating that its earnings for last year, excluding write-offs, would be about US$1.7 billion, compared with about US$4 billion in 2014. The organization said it would earn at least US$1.4 billion from its liquefied gas business.
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Shell said it was taking write-offs within the selection of US$7 billion, although the majority of the markdowns were taken into account earlier in 2015. Lower oil and gas costs are leading companies to lessen the value at which they carry assets on their books.
The company plans to release its official results on Feb. 4, the same week that another big oil companies, including ExxonMobil and BP, intend to report their numbers.
Shell’s cash and share deal for BG was originally costing US$70 billion, but its value has since slipped below US$50 billion.
Ben van Beurden, Shell’s leader, has staked his credibility around the completion of the acquisition. He has argued the BG deal is sensible for long-term competitive reasons, and that oil prices will eventually rise substantially above current levels.
Shell has estimated that it would break even on the acquisition with oil prices at US$60 a barrel. But industry analysts the price of oil could fall to about US$20 a barrel this season, as markets react to a worldwide glut, with international production exceeding demand by in regards to a million barrels each day. , the International Energy Agency, a Paris-based research organization, wrote inside a are convinced that “unless something changes, the oil market could drown in oversupply.”
But van Beurden is still pushing to get BG, a significant player in liquefied natural gas, or LNG, for which demand is expected to develop in coming years like a cleaner option to coal and oil.
“Bold, strategic moves shape our industry,” he explained inside a statement Wednesday. He said the BG deal would “mark the beginning of a brand new chapter in Shell, to rejuvenate the organization and improve shareholder returns.”
Acquiring BG will make Shell the clear leader in LNG among publicly traded oil companies, also it will give it more flexibility to choose where it extracts and delivers, analysts say.
Unlike unprocessed natural gas, which can be transported only where pipelines run, liquefied gas could be carried anywhere in the world by special container ships.
An enhanced capability to offer LNG could be worth as much as $1 billion a year in profit for Shell, analysts say.
The deal would “bring scale and optionality, and that can only be considered a a valuable thing because the LNG market becomes more open,” Claire Scott of Wood Mackenzie in Edinburgh said this month. BG would also bring Shell a remarkable portfolio of gas and oil properties in Brazil, she added.
Indicating how important LNG already is for Shell, a unit called Integrated Gas, which includes LNG and a related business, earned US$1.6 billion to US$1.9 billion in the fourth quarter, equal to nearly all of Shell’s profit. The rest of Shell’s oil and gas exploration and production business have lost a lot more than US$1 billion.
Shell also says that by acquiring BG, it might be able to substantially keep costs down and also the size the job force at both companies.
But some investors remain unconvinced.
“We have concluded that the proposed the acquisition of BG are value destructive for Shell shareholders,” David Cumming, the top of equities at Standard Life Investments working in london, said. He added that his assessment took it’s origin from oil prices moving less than Shell was expecting and took into consideration risks in Brazil.