LONDON – In the latest manifestation of industry damage from the plummeting price of oil, Royal Dutch Shell said Wednesday that it expected its profit for that fourth quarter of 2015 to be about half of the items it was in the comparable period last year.
Shell issued the preliminary estimates before a much-anticipated vote through the company’s shareholders next week on the proposed acquisition of the BG Group, an oil and gas producer. Investors have been skeptical concerning 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 next week. As well as on Wednesday, one large investor in Shell, Norway’s US$790 billion sovereign wealth fund, asserted it might vote in favour of the offer.
BG also released preliminary results Wednesday, predicting that it is full-year earnings for 2015 would come in additional than 57 per cent underneath the previous year’s profits.
Shell estimated that its profit for the quarter, excluding inventory changes and one-time charges, would fall between 42 percent 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 for all of 2015 could be between US$10.4 billion and US$10.7 billion, sharply down from about US$22.6 billion in 2014.
BG, that is based 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 company said hello would earn at least US$1.4 billion from its liquefied gas business.
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Shell said hello was taking write-offs in the selection of US$7 billion, even though the bulk of the markdowns were taken into account earlier in 2015. Lower gas and oil prices are leading companies to reduce the value at which they carry assets on their own books.
The company intends to release its official results on Feb. 4, exactly the same week that some other big oil companies, including ExxonMobil and BP, plan 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 that the BG deal is sensible for long-term competitive reasons, which oil prices will ultimately rise substantially above current levels.
Shell has estimated that it would break even around the acquisition with oil prices at US$60 a barrel. But industry analysts say the cost of oil could fall to around 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 in a are convinced that “unless something changes, the oil market could drown in oversupply.”
But van Beurden continues to be pushing to acquire BG, a significant player in liquefied natural gas, or LNG, for which demand is anticipated to grow in future years like a cleaner alternative to coal and oil.
“Bold, strategic moves shape our industry,” he explained in 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 would give it more flexibility to select where it extracts and delivers, analysts say.
Unlike unprocessed natural gas, which can be transported only where pipelines run, liquefied gas can be carried all over the world by special container ships.
An enhanced capability to deal in LNG could be worth around $1 billion annually in profit for Shell, analysts say.
The deal would “bring scale and optionality, and that can only be considered a positive thing because the LNG market becomes more open,” Claire Scott of Wood Mackenzie in Edinburgh said this month. BG would also bring Shell an impressive portfolio of oil and gas properties in Brazil, she added.
Indicating how important LNG already is for Shell, one called Integrated Gas, which includes LNG and a related business, earned US$1.6 billion to US$1.9 billion in the fourth quarter, equivalent to nearly all of Shell’s profit. The remainder of Shell’s oil and gas exploration and production business have lost a lot more than US$1 billion.
Shell also states that by acquiring BG, it might be able to substantially reduce costs and the size the job force at both companies.
But some investors remain unconvinced.
“We’ve figured the proposed the purchase of BG are value destructive for Shell shareholders,” David Cumming, the top of equities at Standard Life Investments in London, said. He added that his assessment took it’s origin from oil prices moving lower than Shell was expecting and took into consideration risks in Brazil.