London: Royal Dutch Shell Plc got caught into the same earnings trap as many of its peers, reporting second-quarter earnings that fell well short of expectations as the slowing global economy hit everything from natural gas to chemicals.
Profit in Shell’s integrated gas division was down by 25 per cent, but earnings were lower across all of its businesses, including upstream oil and gas production, and refining and chemicals.
“We’ve seen some very severe macroeconomic headwinds — probably most pronounced in our downstream business where we saw some weaker refining margins — but especially a much weaker trading environment for petrochemicals,” Chief Executive Officer Ben Van Beurden said in a Bloomberg TV interview on Thursday. “In our upstream, we’ve seen headwinds particularly in North American gas.”
The Anglo-Dutch company is far more focused on natural gas than its peers, accounting for about a quarter of all the world’s traded liquefied natural gas volumes annually. While this division has helped generate record levels of cash at Shell in recent quarters, a global oversupply has caused prices to slump.
Shell is the last big oil company in Europe to report earnings this quarter, rounding out a generally weaker picture for the industry. Eni SpA, Total SA and Equinor ASA reported lower-than-expected profit due to falling energy prices, although BP Plc surpassed even the highest analyst estimate as its production jumped.
Shell’s adjusted net income was $3.46 billion, down 26 per cent from a year earlier, well below even the lowest analyst estimate. That’s the biggest earnings miss since 2016, according to data compiled by Bloomberg, and comes after a quarter in which Shell comfortably exceeded expectations, underscoring the recent volatility in the company’s earnings.
“All in all, a pretty weak set of numbers across the board,” RBC analyst Biraj Borkhataria said in a note. “Given the strong share price performance recently, we would expect Shell to underperform the peer group in the near term.”
Shares of the company fell 4.3 per cent to 2,490.5 pence as of 8:13am in London, the biggest drop this year.
Despite the big profit miss, cash flow from operations — a measure of financial performance closely watched by analysts — was actually up 16 per cent from a year earlier to $11.03 billion. The figure was buoyed by a positive $600 million working capital movement.
Total oil and gas output increased 4 per cent to 3.58 million barrels of oil equivalent a day. In the quarter, Shell started up the massive Appomattox deepwater oilfield in the Gulf of Mexico, a key project that’s been almost a decade in the making. It gave the go-ahead for the facility in 2015 after slashing costs following an oil price crash.
In June, Shell also started sending LNG cargoes from Prelude, a giant floating facility off Australia that took a decade to bring to life. Cash generated by the shipments wasn’t enough to offset a slump in LNG prices in the second quarter, which were about 40 per cent lower than in the same period in 2018. The slide has continued, with the cost of the fuel in Asia falling to the lowest in a decade.
“What we are seeing this year is the confluence of both the start-up of new LNG-producing facilities coming on the heels of a weak winter,” van Beurden said in an interview with Bloomberg TV.
While much of the attention may focus on the decline in integrated gas earnings, Shell’s upstream business also had a big miss, according to Bloomberg Intelligence analyst Will Hares. It earned $1.34 billion compared with a Bloomberg-compiled estimate of $1.8 billion.