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Shell has reported a fall in earnings for 2014, with a slump in oil prices taking its toll. The drop in net income spurred the company to slash billions in spending, highlighting wider malaise for the oil industry.
Shell's announcement on Thursday that it would slash $15 billion (13.3 billion euros in costs over the next three years was a harbinger of tough times ahead for the global petroleum industry, even though the energy heavyweight managed to log higher overall earnings in the fourth quarter of 2014 in spite of the steep fall in the price of oil.
On Thursday, Europe's largest oil company by market value said improvements in its financial and operating performance had paid off, driving Q4 profits up by 12 percent to $3.3 billion - excluding one-time items and inventory fluctuations.
For 2014 on the whole, with a barrel of oil going for $72 on average, Shell's adjusted earnings rose 16 percent to $22.6 billion.
"Given the headwinds being felt by major oil companies around the world, the share price performance since the beginning of last year, while uninspiring, has still outperformed the oil price, which given the macroeconomic backdrop is all the more surprising," Michael Hewson, the chief market analyst at CMC Markets in London, said in a report.
Lower net income weighs on shares
But things looked less rosy in terms of the company's income. Shell revealed net profits in the fourth quarter had fallen by 57 percent to $773 million. For the full year, those profits were down 8 percent to $15 billion. As a result, the company said it would slash spending by $15 billion over the next three years.
Shell's were the worst performing stocks on Thursday in percentage terms on Britain's top share index, the FTSE 100, dropping 4.7 percent.
"We set out an agenda in 2014 to balance growth and returns in Shell, and our results in 2014 show that this strategy is impactful where it matters: at the bottom line," Shell's chief executive, Ben van Beurden, said in a statement. "Our strategy is delivering, but we're not complacent. Weaker oil prices underline that there's a lot more to do."
A strong balance sheet
A year ago, as van Beurden had just stepped into his new role as CEO, Shell announced a 20 percent reduction in spending at its operations in the United States. It also canceled plans for further investments to drill for oil in Alaska.
The cuts were part of a wider focus on streamlining Shell's business. Two weeks ago, the oil major also scrapped plans to spend $6.5 billion on a petrochemicals plant in Qatar, stating that high capital costs had rendered the project commercially unfeasible.
Van Beurden said on Thursday that Shell would cap 2015 spending at 2014 levels, leaving a decision of whether to further cut expenditures dependent on market conditions. The Anglo-Dutch oil group, which employs some 90,000 people worldwide, did not rule out jobs cuts, although it said it had made no final decision yet.
Shell has one of the strongest balance sheets among the big energy companies in terms of net debt. Other, less diversified players that have invested heavily in exploration, for instance, are far more exposed and vulnerable to fluctuations in the price of oil.
Disappearing profits
Analysts' projections for the average price for a barrel of oil in 2015 - about $50 - do not bode well for the petroleum industry.
"Profits are going to be all but nonexistent," said Michael Jarman, head of equity strategy at H2O Markets in London. "It's cost-cutting issues that are going to steer their ship through these uncertain times."
Shell was the first major producer to issue a quarterly report on earnings since the price of oil began sliding last summer. That forerunner status has allowed Shell to set the scene for other energy companies getting ready to notify investors about last year's performance, but Jarman said he expected declining net profits across the board.
"It's not going to get any prettier over the next year and definitely not in the next three quarters," Jarman said.
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