Asset sales, downstream lift Shell profit: Update

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Shell increased its profit in the first quarter, despite lower oil and gas prices, thanks to strong downstream results, lower costs, asset sales and a tax regime change in the UK.

This is the first set of Shell's quarterly results after the company announced earlier this month a deal to acquire UK-listed BG group, due for completion early next year.

Shell's profit increased by 7pc to $4.76bn compared with the first quarter of 2014. But excluding one-off items, it fell by 56pc to $3.25bn. The positive impact of one-off items on this quarter's profit included upstream asset sales and a $600mn credit thanks to tax regime changes in the UK North Sea, while in the same period last year the company wrote off $2.58bn in its downstream division.

Shell's operating cash flow dropped by 49pc to $7.11bn. The company divested $2.2bn of assets in the first quarter, including interests in onshore blocks and facilities in Nigeria, but noted that "a huge contribution" from asset sales for the rest of the year is unlikely.

"In what is clearly a difficult industry environment, we continue to take steps to further improve competitive performance by redoubling our efforts to drive a sharper focus on the bottom line in Shell," said chief executive Ben van Beurden. "Part of this sharper focus is the sale of non-strategic assets... In parallel we continue to reduce our operating costs and capital spending; and by deferring and reshaping new projects, we can achieve further efficiencies and savings in the global supply chain."

The company's operating costs in the quarter — excluding one-off items — fell by about $1.1bn, or some 10pc from the same period of 2014. Most of the reduction came from a stronger dollar, with the rest from the company's cost-cutting moves, and "there is more to come" this year, according to chief financial officer Simon Henry.

Shell expects 2015 organic capital investment budget to be $33bn or less, some $2bn below last year's level and its previous guidance for this year. Capital investment for the first quarter amounted to $6.8bn.

The company said it continues to "curtail capital investment, retaining attractive options for the medium term, whilst balancing affordability, growth and returns". Shell has delayed a final investment decision on the full development of the Majnoon field in Iraq into 2017 or later and "re-phased the development pace of the Carmon Creek heavy oil development in Canada on phases 1 and 2, looking to optimise the design and likely re-tender some parts of the project to bring costs down". The company has also continued to reduce spending on shale resources, cutting it by about 20pc to $3.2bn.

The firm's oil and gas production fell by 2pc on year to 3.17mn b/d of oil equivalent (boe/d) in the first quarter, largely because of divestments since the first quarter of 2014. Oil output rose by 4pc to 1.54mn b/d and gas production fell by 8pc.

"New field start-ups and the continuing ramp-up of existing fields, in particular Bonga NW in Nigeria, Gumusut Kakap in Malaysia, and Mars B and Cardamom in the Gulf of Mexico, contributed some 137,000 boe/d to production for the first quarter 2015, which more than offset the impact of field decline," the company said.

Shell's upstream division made a quarterly profit of $2.54bn, down by 53pc on the year. But excluding one-off items it dropped by 88pc to $675mn because of lower oil and gas prices and lower contributions from trading. The fall in profit was partially offset by lower costs, "new high-margin liquids production volumes from new deep-water projects and improved operational performance, despite the impact of planned maintenance at Pearl GTL."

But Shell's Upstream Americas business lost more than $1bn in the quarter, with lower oil prices cutting earnings by $2bn year on year, given the high price sensitivity of its deepwater and heavy oil activities. Shell's shale business remained loss-making because of lower prices, despite showing "huge improvements" in performance, Henry said. "Actual costs have come down, but the macro environment around the Americas performance is just a lot tougher at the moment".

The company's downstream business made a quarterly profit of $2.51bn compared with a loss of $1.01bn in January-March of 2014 thanks to strong refining margins around the world, lower costs and higher trading contributions. But "the refining boom is probably already running down in April", according to Henry. ""We are already seeing lower margins, although not yet as low as they were in the recent past".

Shell said that its second-quarter results will be impacted by "some 160,000 boe/d as a result of divestments, and approximately 100,000 boe/d associated with the impact of curtailment and underground storage reinjection at NAM" compared with the same period of 2014. In addition, 140,000 boe/d of production will be affected compared with the second quarter of last year because of planned maintenance, mainly at "Pearl GTL in Qatar, Deepwater Gulf of Mexico, and heavy oil in Canada".

The company expects its second-quarter operating cash flow to be impacted by divestment tax payments of up to $1bn.

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