LONDON-- Royal Dutch Shell PLC profit fell by as much as 50% in the fourth quarter, illustrating how the slump in oil prices is playing havoc with its performance as the company tries to take over BG Group PLC.
Shell said on Wednesday that earnings excluding identified items came in at between $1.6 billion and $1.9 billion in the three months to end-December, down from $3.3 billion for the same period a year earlier. Its profit for the year on the same basis is expected to have fallen to between $10.4 billion and $10.7 billion, down from $22.6 billion in 2014.
The numbers slightly missed expectations for adjusted profit of $2 billion in the fourth quarter, according to a Dow Jones poll of five analysts.
Shares in Shell fell around 6% in morning trading, outpacing a broad selloff across the sector as oil prices hovered at 12-year lows.
Oil prices fell under $28 a barrel in early Asia trading Wednesday. A glut of global production is likely to continue, with many of the world's biggest oil-producing countries focusing on market share rather than on supporting prices.
Shell is the first among the largest independent oil companies to disclose financial information for its fourth quarter and full year 2015, releasing preliminary results ahead of a Jan. 27 shareholder vote on its cash and share bid for BG which values its smaller rival at roughly $50 billion.
"The completion of the BG transaction, which we are expecting in a matter of weeks, will mark the start of a new chapter in Shell, to rejuvenate the company, and improve shareholder returns," Shell Chief Executive Ben van Beurden said in a statement.
If approved, the merger would give Shell a stake in highly-prized oil fields offshore Brazil and bolster its already sizable position in the growing liquefied natural-gas market. Oil prices have plunged more than 50% since the April deal was struck, raising concerns among some investors and analysts about its cost.
Shell didn't give estimates for its earnings on a current cost-of-supplies basis--a number similar to the net income that U.S. oil companies report, but will do so early next month when it releases its complete fourth quarter and full year results.
The sharp slide in oil prices has hammered oil companies earnings over the past year, as burgeoning supplies of oil glutted the market. Oil prices averaged a little over $40 a barrel in the fourth quarter, down from more than $70 a barrel in the same period a year earlier, according to analysis from Barclays.
The impact at Shell was visible in the sharp drop, as expected, in fourth-quarter earnings for Shell's exploration and production arm to between $0.4 and $0.5 billion, compared with compared with $1.7 billion in the fourth quarter of 2014. That was despite a strong contribution from Shell's gas operation, an increasingly important and prominent aspect of the group ahead of its tie-up with BG, where earnings came in at $1.6 billion to $1.9 billion.
Shell put profit from it is refining and marketing business at between $1.4 and $1.6 billion, missing consensus expectations of $2.1 billion, according to brokerage house Jefferies.
The world's integrated oil companies--which operate along the whole oil supply chain; pumping crude from the ground, refining and marketing it--have benefited from their exposure to the oil processing business over the past year. As the price of crude oil fell and demand for products like gasoline increased, refinery profits rose sharply, helping to offset somewhat the impact of low oil prices.
Shell has pitched the BG transaction as a means to strategically restructure the company and quickly generate additional cash flow from BG's production despite weak prices. BG notched up a 16% increase in production in 2015 to 704,000 barrels of oil equivalent a day.
"The completion of the BG transaction, which we are expecting in a matter of weeks, will mark the start of a new chapter in Shell, to rejuvenate the company, and improve shareholder returns," Shell Chief Executive Ben van Beurden said in a news release.
There have been misgivings about the cost of the deal in some quarters. One big investor, Standard Life, has called it "value destructive."
But shareholders are expected to vote in favor of the transaction next week which is backed by several shareholder advisory firms as well receiving ringing endorsements from some analysts.
"It is clear today that operationally and financially, both Shell and BG are maneuvering through this down-cycle reasonably well," said Bernstein Research in a note. "With continued reduction of costs inside both companies in 2016 and market balancing now firmly on the horizon, the combined entity will be one of the key winners on the other side."
