LONDON (Reuters) — Royal Dutch Shell's
chief executive Ben van Beurden has, on the face of it, played the
classic "new boss" card — using a barely justified profit warning to
brighten his own future by making the past look bad.
The truth is quite different, the energy company says, and possibly
far more worrying for investors.
Three trading days after van Beurden's warning last Friday that
quarterly net profit will fall far short of expectations, Shell's
shares are barely down 1.5 percent in a flat market.
But while circumstances conspired to make the fourth quarter
particularly bad for Shell, there is no guarantee that the group
will bounce back this year. Van Beurden, some shareholders say, must
do more than tighten up a bit and sweep away a few cobwebs when he
reveals his strategy in March.
A fortnight into his tenure, the Dutchman broke a traditional
pre-results silence at Europe's biggest investor-controlled oil
company. Pre-empting the official announcement on January 30, he
revealed numbers showing October-December last year was Shell's
worst quarter since 2009. He also called the whole 2013 performance
"not what I expect from Shell".
Few commentators and analysts failed to connect the rhetoric with
the fact that removal boxes have scarcely been cleared from the
boss's office in The Hague. Using such warnings, new chiefs
frequently try with varying degrees of subtlety to shift the blame
for a company's problems on to the past leadership, and lower
expectations for their own tenure.
"It's standard practice, but this was done very transparently, and
that's high risk," said a person who has deep experience of
corporate presentation strategies, but was not involved. "Everyone
knows the game he is playing."
At $2.9 billion for adjusted earnings on a current cost of supply
basis, the fourth quarter net profit figure van Beurden gave was
well below market expectations of around $4.0 billion. But misses
like this are common in the energy industry, and rarely have a
significant or long-lasting impact on investor sentiment. Profit
warnings to flag them are also rare.
Shell missed forecasts just as badly in the second quarter last
year, making a $4.6 billion profit compared with analysts' average
prediction of $5.7 billion. That time it did not alert shareholders
in advance. Neither did it when profits beat estimates by a similar
amount in the first three months, making$7.5 billion versus the $6.5
billion forecast.
Some of Shell's rivals have also produced surprises in the past two
years, with results both above and below expectations.
Executives and investors alike insist that quarterly and even annual
performance is a poor measure of an industry that works on much
longer investment timescales. Some also question the quality of
forecasts made by analysts at brokerages and investment banks.
The rest of van Beurden's statement went over old ground, citing
"weak industry conditions in downstream oil products, higher
exploration expenses, and lower upstream volumes".
For the oil and gas production division — the main driver of profits — van Beurden said there had been a high level of maintenance
activity during the quarter in high value production areas,
including the Pearl Gas to Liquids (GTL) plant in Qatar, and in
Liquefied Natural Gas (LNG).
Security in Nigeria continued to be "challenging", he said, U.S.
operations remained lossmaking, and currency factors in Australia
had worked against the company.
All of these factors had already been flagged by finance director
Simon Henry at the end of October, in some detail.
"Our focus will be on improving Shell's financial results, achieving
better capital efficiency and on continuing to strengthen our
operational performance and project delivery," van Beurden promised,
using words his predecessor, Peter Voser, would recognize.
DEEPER WORRY
So much for appearances. Shell had deeper concerns, according to
Andy Norman, the company's Vice President Media Relations. His
comments set against the limited market reaction suggest management
is far more shocked than investors have been by the scale of the
downturn.
Shell says the warning was dictated neither by analysts' average or
"consensus" forecast nor the new leadership. "Consensus was not a
factor in the announcement," Norman told Reuters, adding: "These
decisions are made by clear accounting rules. They're not influenced
by senior executive changes.
Norman acknowledged that when Shell announced its third quarter
results it flagged operational factors that were likely to make the
rest of the year tough. "While this operational guidance was
correct, the factors turned more negative than we expected during
the quarter," he said.
"At $2.9 billion, Q4 earnings are expected to be well below the $5-7
billion range we've typically seen in most quarters in recent years.
After taking legal advice we concluded we had an obligation to
disclose the Q4 numbers as soon as possible in order to comply with
stock exchange rules on fair disclosure."
How much the fourth quarter problems persist is crucial,
according to Oswald Clint, analyst at Bernstein. "It may be that
everything went against Shell this quarter but it doesn't mean it
will bounce back next quarter either," he said.
Even before Friday's statement, investors were increasingly
expecting radical action from van Beurden, who was promoted to the
post on January 1 after Voser's surprise early retirement. He has
his chance at a strategy day on March 13.
"The market's not going to judge him on this (statement), but they
will be disappointed if — come that first management strategy day
where he stands up and gives his vision — it's all a bit more of the
same, a bit of tightening up and sweeping away a few old cobwebs,"
said a British-based institutional shareholder who asked not to be
named. "That's not going to be enough."
Some analysts and investors advocate a gradual structural move
towards high-margin LNG, and away from moribund refining — a
departure from the traditional integrated oil model which they hope
might highlight the value in Shell's market-leading LNG position.
Others want to go in that direction more quickly. There has also
been talk the underperforming U.S. business may be jettisoned
entirely.
BEURDEN OF RESPONSIBILITY
Leaving aside more radical measures, van Beurden's task is tricky — not least because this week he lost his head of international
upstream operations, Andy Brown, for an unspecified period of
medical leave.
Van Beurden has little room for maneuver in an industry that has to
invest 10 and 15 years ahead, yet must satisfy shareholders with a
much shorter attention span.
"I'd be surprised if you were looking at radical changes because an
awful lot of the project pipeline — stuff that takes years to put
together — it's not easy to move that around," said VTB Capital
analyst Colin Smith.
Shell's net investment spending — money flowing out — was $44.3
billion in 2013. Cash flow from operations — money in — was $40.4
billion. Those two numbers broadly reflect level or falling output
and prices set against rising costs, and they show that Shell
effectively "burned" nearly $4 billion last year. Shareholders fear
for their $11 billion of annual dividends as a result, and Shell has
been seen as the least attentive of its peer group to this
industry-wide concern.
Returns on investment data going back to April 2010 show the company
underperforming three out of four of its main rivals — the fourth
being BP, which took a direct hit from the Gulf of Mexico oil spill
in that month.
Lately though, like its peers, Shell has promised that capital
spending has peaked. Its move to abandon a GTL project in the United
States [ID:nL2N0JK1S5] and likely abandonment of its Arrow LNG
project in Australia [ID:nL5N0IW3NM] are signs of those efforts.
Also falling into line with its rivals, Shell has promised to step
up asset sales, an action which both brings in cash and cuts
outgoings.
Shell has a four-year net investment target of $130 billion for 2012
to 2015. Including $30 billion spent in 2012 and $44.3 billion in
2013, it spent over $74 billion in the first two years. That leaves
less than $23 billion a year for 2014 and 2015, $20 billion short of
2013's budget.
If van Beurden is going to meet that target — and some say he will
dump it either on January 30 at the results day or at the March
strategy day — he will have to make up that gap through $20 billion
a year-worth of asset sales, project-abandonment, and other cost
saving measures.
(Additional reporting by Chris Vellacott
and Sarah Young; editing by David Stamp)
