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Kitchen cleanout

29 October 2015 By Fiona Maharg-Bravo

Shell is kitchen-sinking its business in the face of low oil. The Anglo-Dutch major’s third-quarter earnings were scarred by a net charge of $7.9 billion. The hits are painful, but reflect healthy realism at Shell ahead of the expected completion of its deal with BG early next year.

The headline numbers reported on Oct. 29 are grim. The market was braced for some writeoffs after Shell recently ditched exploration in Alaska and a Canadian oil sands project. Even so, the charges were bigger than expected. Some $3.7 billion came as the company revised its long-term view of the oil price – and so the value of its assets – down. Yet excluding writeoffs, the earnings were still 70 percent lower. Currencies partly explain why the headline earnings were about $1 billion below consensus. Shell’s upstream business, however, lost money.

The figures look even worse compared to a brighter picture from rival Total. The French oil major reported a 23 percent fall in profit, better than peers and ahead of expectations. It also upped its production growth guidance to 9 percent this year, while Shell warned its fourth-quarter production would suffer after growing 3 percent in the quarter.

Nor has Shell followed BP and Total in promising to cover dividends with organic cashflow at $60 oil by 2017. Shell, however, points to the fact that it has already managed to balance the books in the last 12 months with the oil price averaging $60, though this includes asset sales.

Shell has some cushion: net debt is 12.7 percent of total capital, against 20 percent at BP. Costs also have come down by $3.7 billion this year, according to analysts at Barclays, already close to a 2015 target of $4 billion. Capex may come in below budget for the year.

Investors are sceptical: the dividend yield is above 7 percent. That may overstate the risk of a dividend cut since Shell saves cash by paying around a quarter of the dividend in shares. Shell says it will maintain the dividend this year and the next and that it covered dividends with cashflow in the last year. With the current oil price below $50, however, the balancing act is only going to get more difficult.


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