Oil giant Shell’s profits have been hit by falling commodity prices, causing them to cut their spending by 10% and offer reduced forecasts into Q2.
Shell’s data for this first quarter of 2016 showed earnings at $1.6 billion – 58% lower than the same figure for the first quarter of 2015, though still higher than the $1 billion predicted by market analysts.
In order to offset these losses, they will be reducing their spending for 2016 from the forecasted $33 billion to $30 billion.
Plummeting oil prices have hit Shell hard, as they have other oil companies, particularly in their upstream business, which includes their exploration and production activities.
However, also like many other oil companies recently, revenue from the company’s downstream business (including refining and trading) managed to offset some of the losses from their upstream activities.
Shell’s upstream activities came in at a loss of $1.4 billion for the quarter, rather significantly larger than the loss of $195 million it experienced last year. However, some of this large difference is down to the transferral of its integrated gas unit, worth $994 million, from upstream to downstream.
Shell’s downstream business made a profit of $2 billion, which was lower than the first quarter of 2015 when $2.6 billion was made, but still higher than the $1.5 billion made in the final quarter of 2015.
Mr van Beurden said: “Downstream and integrated gas businesses are delivering strong results and underpinning our financial performance despite continued low oil and gas prices.
“We continue to reduce our spending levels, to capture cost opportunities and manage the financial framework in today’s lower oil price environment.”
Shell recently completed a $54 (£35) billion takeover of rival oil company BG Group and had already intended to start cutting back spending in order to appease investors who felt that such a large buyout was not the most sensible idea with oil prices at their current lows.
Now, with their latest revenue figures looking weak, they are bringing these spending cuts forward much earlier than was planned.
Shell’s chief executive Ben van Beurden said: “The combination with BG is off to a strong start, as a result of detailed forward planning before the completion of the transaction. This will likely result in accelerated delivery of the synergies from the acquisition and at a lower cost than we originally set out.
“The completion of the BG deal has reinforced our strategy and strength against the backdrop of hugely challenging times for our industry. For Shell and our shareholders, this is a unique opportunity to reshape and simplify the company.”
Shell have said that they intend to keep paying their dividend out at $0.47 a share, but there is growing concern that this may be unsustainable.
Laith Khalaf at Hargreaves Lansdown said: “The dividend now accounts for $2 for each $1 that Shell earns, which is clearly unsustainable in the long term.
“The company will be hoping it gets bailed out by a recovery in oil and gas prices before it looks down and realise the ground it was running on has disappeared.”
Biraj Borkhataria of RBC Capital, however, warned against placing too much importance on these Q1 figures so soon after the merger with BG Group.
He said: “It would be a faux pas to read too much into one quarter’s headline numbers, in our view, so to that end, we think investors will look through any uncertainty and focus on the longer term story.”
