City awaits details after Shell shock

OIL major Royal Dutch Shell is expected to reveal huge write-offs this week which investors hope will account for its recent profits warning.

Chief executive Van Beurden is keen to make changes at Shell. Picture: AFP/Getty

After the shock update effectively publicised the firm’s headline figures for the final quarter of last year, this week the City will be looking for clues as to whether Shell’s shrinking bottom line is temporary or structural.

In its warning, Shell said that profits will almost halve to around $2.9 billion (£1.8bn). With previous market expectations of a $4bn haul, it will be the latest disappointment for shareholders after the firm’s earnings declined dramatically throughout 2013.

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But Tony Shepard, an analyst at wealth manager Charles Stanley, said he feels it is likely that one or two “big numbers” will be behind the latest miss. He thinks the firm could post exploration losses of $1bn, accounting for most of its shortfall on forecasts in a manner that will not alarm investors.

The firm has already made large write-downs on its investment in the US shale liquids industry in recent quarters. Confidence that Shell’s difficulties are due to temporary factors account for the fact that its share price held up well.

However, the company has said that the revised earnings figure reflects poorer results in each of its upstream, downstream and corporate divisions. In full-year results the firm will likely emphasise that cash-flow has held up much better than bottom line profit, while 2013 has been an expensive year in terms of capital outflows.

The group generated more than $40bn in cash during 2013, and spent almost $45bn on capital projects and acquisitions. Its dividend yield of more than 5 per cent remains a solid backstop to the share price.

But Shepard said the oil giant’s new chief executive, Ben van Beurden, still has questions to answer following his comments that the recent performance was “not what he expected” from the firm.

“I think people will be interested to see the detail,” Shepard said. “There are a number of factors they have to explain. The next few weeks are quite important for the company.”

Another factor that helped Shell’s shares to shrug off the warning was talk that Van Beurden was “kitchen sinking” – a tactic where a new chief executive paints a darker picture of current performance in order to be seen to make improvements later.

Whether that is the case or not, the new boss appears keen to make changes at the notoriously bureaucratic company. Just last week he provided a glimpse of a new strategy by selling Shell’s interests in an Australian liquefied natural gas (LNG) project for $1.1bn. Van Beurden said Shell, which has become a world leader in the LNG sector, would remain a major player in Australia’s energy industry.

But he added: “We are ­refocusing our investment to where we can add the most value with Shell’s capital and technology.”

Analysts say Shell could look to raise $15bn through divestments this year, with its share in Australian group Woodside Petroleum one of the prize assets it could look to sell.

The new boss is due to make a speech outlining his strategy in March, but with pressure already mounting he will face questions on Thursday when he explains why full-year profits fell by almost a quarter in the last year of his predecessor’s reign.

Neill Morton, an analyst at Investec, said: “With the new chief executive starting in January, the market is hoping that the weak profits in the fourth quarter in particular will give him more power internally to change things.”