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Shell CEO Says 2013 Performance 'Not What I Expect'

For the first time in 10 years, Royal Dutch Shell plc has issued a profit warning, indicating on Friday that its fourth quarter earnings would be significantly lower, in part because of the commodity price environment.

The last time the oil major warned investors on its earnings was in 2004, when it had to reclassify almost 20% of its proved reserves (see Daily GPI, Jan. 12, 2004). The restatement led to the resignation of several top officials, including the CEO, and a U.S. Securities and Exchange Commission investigation (see Daily GPI, April 20, 2004).

"Our 2013 performance was not what I expect from Shell," said newly installed CEO Ben van Beurden. He took over Jan. 1. "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."

Net quarterly earnings are expected to be about $2.2 billion, using a current cost of supplies (CCS) basis, which is used by European-based operators. Full-year 2013 CCS earnings are projected at $16.8 billion. In the year-ago quarter, Shell earned  $5.6 billion, with 2012 earnings of $25.1 billion (see Daily GPI, Feb. 1, 2013).

For the final quarter of 2013, Shell expects to take a net charge of around $7 million, "mainly reflecting impairments" in the upstream business. A net charge of around $2.7 billion is estimated for 2013, also on upstream impairments.

"Compared with the fourth quarter 2012, upstream earnings...were impacted by higher exploration expenses and lower volumes," management said.

Also to blame, it said, were a high level of maintenance activity in the final period, which affected volumes, including gas-to-liquids, as well as liquefied natural gas sales volumes.

Cash flow from operating activities in 4Q2013 is expected to be $6 billion, compared with $9.9 billion in 4Q2012. For the year, cash flow is estimated at $40.4 billion, down from $46.1 billion in 2012. Capital investments totaled about $15.8 billion in the final period, and Shell spent about $44.3 billion in 2013.

Shell already was planning to reduce its North American gas production this year (see Daily GPI, Oct. 15, 2013). The company, which has stakes in the onshore and in the offshore Gulf of Mexico and Alaska, took a $2.2 billion charge for 2Q2013 primarily against its North American unconventional investments (see Daily GPI, Aug. 2, 2013).

A lot of its North American onshore properties now are being marketed, with as much as half of its nine main unconventional onshore properties on the list for sale. The Eagle Ford Shale and Mississippian Lime properties already are being marketed.

Tudor, Pickering, Holt & Co. Inc. analysts said the $2.9 billion in gross CCS earnings estimated for the final period are "clearly below our $4.3B estimate," which is 7% below Wall Street's consensus. "Most of the factors cited are consistent with the prior warning (weaker downstream, higher exploration expense, lower production), but the magnitude was more significant and Australian dollar weakness was added to the list."

The operator, said analysts, "will need better results, a clearer strategy and asset sale proceeds to get out of their value trap. Hope springs eternal and we expect to see these in 2014."

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