European Oil Giants Post Steep Profit Falls

European oil giants Royal Dutch Shell plc and Statoil ASA are the latest companies to show how badly they have been affected by the lower oil price environment, after they posted steep declines in their fourth-quarter profits Thursday. The poor results come after BP plc and Exxon Mobil Corp. posted similarly-disappointing performances on Tuesday

Shell posted a profit of $1.9 billion in 2015, which was 87 percent less than the $14.8 billion income registered in 2014. The company's full-year 2015 cash flow from operating activities was $29.8 billion (2014: $45 billion) and cash flow from operating activities for the full year was $24.3 billion (2014:  $38.6 billion). Shell's capital investment was $28.9 billion in 2015, which was $8.4 billion lower than 2014. 

Combined capital investment for Shell and BG following the completion of their merger, which will be executed in "a matter of weeks", according to Shell CEO Ben van Beurden, is expected to be $33 billion for the full year in 2016 – down 45 percent from combined spending which peaked in 2013. In addition to the spending cuts, Shell warned that it retains flexibility for further reductions "should conditions warrant this". Shell's operating costs for the full year 2015 decreased by $4.1 billion, to $41.1 billion, and the company's costs are expected to fall again in 2016, by a further $3 billion.

Oil and gas production for Shell in 2015 was 2.954 million barrels of oil equivalent per day, a decrease of 4 percent compared to 2014. At the end of 2015, the company’s total proved reserves on an SEC basis are expected to be 11.7 billion boe, after taking into account 2015 production. 

Van Beurden commented in the company's fourth quarter results statement: 

"The completion of the BG transaction, which we are expecting in a matter of weeks, marks the start of a new chapter in Shell, rejuvenating the company, and improving shareholder returns.

"We are making substantial changes in the company, reorganizing our upstream, and reducing costs and capital investment, as we refocus Shell, and respond to lower oil prices. As we have previously indicated, this will include a reduction of some 10,000 staff and direct contractor positions in 2015-16 across both companies. 

"In 2015, we significantly curtailed spending by reducing the number of new investment decisions and designing lower-cost development solutions. For 2016, we have exited the Bab sour gas project in Abu Dhabi, and are postponing final investment decisions on LNG Canada and Bonga South West in deep water Nigeria. Operating costs and capital investment have been reduced by a total of $12.5 billion as compared to 2014, and we expect further reductions in 2016. 

"As a result of our actions in 2015, we have retained a strong balance sheet position, with 14-percent gearing. Shell will take further impactful decisions to manage through the oil price downturn, should conditions warrant that."

Statoil recorded an income of NOK 14.9 billion ($1.75 billion) for 2015, which was 86-percent less than the company's profit of NOK 109.5 billion ($12.8 billion) in 2014. The Norwegian energy company announced in its 4Q 2015 results statement that it will reduce its capital expenditure to $13 billion in 2016, from $14.7 billion in 2015. Statoil expects to deliver "efficiency improvements" with pre-tax cash flow effects of around $2.5 billion from this year and the company has earmarked $2 billion for exploration activity in 2016.

Statoil's average daily production of liquids and gas decreased by two percent to 1.309 million boe per day in the fourth quarter of 2015 compared to the fourth quarter of 2014. The decrease was mainly due to expected natural decline on mature fields, lower gas sales and redetermination. From 2014 to 2017, Statoil estimates an annual organic production growth of around one percent and from 2017 to 2019 the company anticipates a one-to-four-percent organic annual production increase.

Statoil CEO Eldar Sætre commented:

"Statoil is well positioned to capture value from an expected upturn in the market. We have substantially improved our non-sanctioned project portfolio. More than 80 percent of the operated projects, with start-up by 2022, have a break-even oil price below $50 per boe."

The profit decline of Shell and Statoil follows similar income falls for Exxon Mobil Corp and BP. Exxon revealed February 2 that it had registered its smallest quarterly profit in more than a decade and said it would cut 2016 spending by one-quarter, and suspend share repurchases, as it copes with a prolonged downturn in crude prices. BP made an 'underlying replacement cost profit' of $5.9 billion for the whole of 2015, compared with $12.1 billion in 2014 – a fall of 51 percent.

A graduate in journalism from Cardiff University, Andreas has eight years of experience as a business journalist. Email Andreas at andreas.exarheas@rigzone.com

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