LONDON (Alliance News) - Royal Dutch Shell PLC Wednesday said earnings plummeted in the first quarter of the year and warned earnings will fall even further in the next quarter as all of its divisions will suffer from reduced production, while exceptional costs will rise thanks to the BG Group acquisition.
However, the oil giant also said its full-year expenditure is likely to be considerably lower than previously guided.
Shell said its current cost of supply earnings dropped to USD814.0 million in the first quarter of 2016 from the USD4.80 billion reported a year earlier. Before exceptional items, CCS earnings halved to USD1.60 billion from USD3.70 billion.
Compared to the fourth quarter of 2015, CSS earnings fell from USD1.84 billion but rose slightly from USD1.57 billion once exceptional items are excluded.
Exceptional items led to an overall net charge of USD739.0 million in the quarter, booked against foreign exchange, impairments and stamp duty.
The first quarter results were the first set of financial results to have incorporated BG Group following the USD54.03 billion acquisition completed in February, of which USD19.03 billion was paid in cash by Shell with the remainder satisfied in Shell shares issued to BG Group shareholders.
Shell said its earnings were hurt by continued declines in oil, gas and liquefied natural gas prices, alongside weaker conditions within the refinery industry. On the other hand, earnings benefited from lower operating expenses, as steps taken by Shell to reduce costs more than offset the increase in operating expenses associated with the acquisition of BG Group, Shell said.
The upstream division which houses production operations remained loss-making in the quarter, delivering a CCS loss of USD1.43 billion in the quarter compared to the USD195.0 million loss booked a year earlier. The loss also was wider than the USD1.00 billion loss in the final quarter of 2015.
Production in the quarter amounted to 3.7 million barrels of oil equivalent per day, a 16% lift from a year earlier after BG Group added an additional 522,000 barrels a day to production.
The downstream division generated CCS earnings of USD2.01 billion in the quarter, falling from USD2.64 billion a year earlier but rising from USD1.52 billion in the final three months of 2015.
The integrated gas division remained profitable after delivering CCS earnings of USD994.0 million, but that was down from USD1.49 billion a year earlier and a fall from the USD1.24 billion generated in the final quarter of 2015.
Shell conceded that its upstream division is being held up by its other two divisions which are "underpinning" the company's financial performance within the current oil price environment.
Cashflow from operating activities came in at USD661.0 million, which included negative capital movements of USD3.90 billion, compared to cashflow of USD7.10 billion a year earlier. In the fourth quarter of 2015, cashflow amounted to USD6.42 billion.
Gearing at the end of the quarter stood at 26.1% compared to only 12.4% at the end of March 2015, reflecting the BG Group acquisition and the impact of finance leases, it said.
Shell said the combination with BG Group has made a "strong start" and believes its forward planning will lead to the delivery of cost and revenue synergies being accelerated at a lower cost than originally set out.
"Putting all of this together, capital investment in 2016 is clearly trending toward USD30 billion, compared to previous guidance of USD33 billion, and some 36% lower than combined Shell and BG investment in 2014," said Shell.
"Annual operating expenses excluding identified items are trending towards a run rate of USD40 billion compared with 2014 combined spend of around USD53 billion," Shell added.
Overall, Shell is expecting to absorb BG Group's capital investment and operating expenses during 2016, with "no net increase overall compared to Shell stand alone in 2015" - implying the acquisition will have no negative impact on financial results this year.
But, the acquisition and integration of BG Group will lead to some substantial costs in the second quarter, whilst all of Shell's producing divisions will be negatively impacted by lower production compared to the first quarter.
Shell said it expects to book "substantial redundancy and restructuring charges" in the second quarter of 2016, which will be booked as exceptional items, and said tax payments amounting to USD830.0 million will be booked against assets it has divested, impacting its cashflow from operating activities.
The BG Group acquisition will lead to a USD300.0 million rise in depreciation costs n the second quarter, Shell warned.
"Given the significant decline in oil and gas prices in the first quarter 2016, second quarter earnings are expected to be negatively impacted by the price-lag effect in our LNG contracts," said Shell in a statement.
Adding to the large costs to emerge in the second quarter, Shell said the already loss-making upstream unit will lose around 25,000 barrels a day of production from Malaysia in the second quarter and another 10,000 barrels a day from divestments. However, the unit will benefit from lower levels of curtailment and underground storage utilisation in the Netherlands, it said.
The downstream unit will suffer in the second quarter from reduced refinery availability as maintenance work will take longer than what it did last year, Shell said.
The third unit, integrated gas, will lose 30,000 barrels of oil equivalent per day in the second quarter from maintenance work and another 25,000 barrels from maintenance work at operations in Qatar.
"The completion of the BG deal has reinforced our strategy and strength against the backdrop of hugely challenging times for our industry. For Shell and our shareholders, this is a unique opportunity to reshape and simplify the company," said Chief Executive Ben van Beurden.
Shell said it has reviewed its UK footprint following the acquisition, and said it will consolidate Shell's London and South East based operations into central London, leading to the closure of offices in Thames Valley Park in Reading.
The review also led to the decision to move all of the onshore operations based in Aberdeen in Scotland to the Shell Aberdeen Tullos office, with BG's offices at Albyn Place closing by 2016 and the closure of Shell's Brabazon House office in Manchester by the end of 2017.
Shell retained its quarterly dividend of 47.0 cents per share, as expected and guided by the company.
Shell 'A' shares were trading down 0.5% to 1,746.50 pence per share on Wednesday morning whilst 'B' shares were down 0.4% to 1,754.0p.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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