Perfect Storm of Problems Forces Shell to Announce 48% Drop in Earnings

On Friday, ahead of the official date of release for its full earnings report (30th of January), Shell has decided to warn the market and its investors, that due to across-the-board problems the company will post much lower fourth quarter earnings than predicted.

Chevron Corp were forced to offer a similar warning last week; a sign of just how much pressure the industry is under as it tries to balance the issue of replacing depleting reserves, rising costs, and lower oil prices.

Ben van Beurden, the new CEO of Shell, remarked that the “2013 performance was not what I expect,” after having to cut fourth quarter adjusted earnings to just $2.9 billion, down from expectations of roughly $4 billion.

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Reuters reports that the last time the company reported such a low figure was in 2009, and that since then it has been averaging around $5.6 billion a quarter.

Analysts blame a perfect storm of problems over the past three months for the dismal earnings, claiming that profit margins in the refinery sector have fallen, production costs have increased, Nigerian output has suffered, and the Australian dollar, where Shell is developing some of its largest projects, has taken a dive.

Carsten Fitch, from Commerzbank, said that “Shell’s profit warning is a confirmation of the impact of the downward trend in oil prices we've seen. In particular, the refined product markets in Europe have been very weak;” where Shell has a huge number of its refining operations.

Under Peter Vosser, van Beurden’s predecessor, Shell began to focus on the liquid natural gas (LNG) business, turning the company into a world leader in the sector, but Barclays explains that “with nearly a fifth of its LNG portfolio down for maintenance, the final quarter of 2013 was never likely to be a good quarter for Royal Dutch Shell.”

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With the arrival of van Beurden investors have been hopeful that the company’s spending will be more tightly controlled in order to improve cash flow and strengthen the core of the business. Van Beurden stated that “our focus will be on improving Shell's financial results, achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery.”

Unfortunately this is now the third straight quarter of disappointing earnings and the NY Times claims that it will take more than just a new CEO to turn the company around quickly. The oil industry is a long-term business requiring years to develop projects before they can begin to contribute positively to earnings.

By. James Burgess of Oilprice.com