Write-offs plunge Shell into the red

Hefty charges for postponing major exploration projects has pushed Shell deep into the red, as its upstream business struggles to adapt to weak oil prices. While project cancellations weren't an easy decision to make, the oil major is confident its BG acquisition will give it enough fire to return to profitable growth.

After putting Alaskan drilling on ice and terminating the Carmon Creek thermal oil sands project, charges surged to $8.6 billion in the third quarter, plunging Shell into a $6.1 billion (£4 billion) loss compared to $5.3 billion profit last year. While Shell has reported a $0.97 loss per share, operating cash flow fell 13% to $11.2 billion. With a "highly competitive" financial framework, gearing has been maintained around 12.7%, despite the halving of oil prices.

"We have halted exploration activities offshore Alaska, and stopped the construction of the Carmon Creek in-situ oil project in Canada. These are difficult, but impactful decisions. I am determined that Shell will become a more focused and competitive company as a result," said chief executive Ben van Beurden.

Shell paid out $3 billion in dividends in the quarter and a further pay-out worth $0.47 per ordinary share and $0.94 per American Depositary Share has been announced.

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To adapt to a low price environment, oil companies are relying on their downstream businesses - refining crude oil and selling it - to offset weak performances in upstream operations - exploration and production. Downstream earnings rose by nearly half to $2.6 billion in the third quarter, while upstream earnings tanked from $4.3 billion to a $425 million loss.

Oil companies have also slashed their capital expenditure budgets, in another attempt to protect themselves from lower prices. Shell's capex budget now sits 20% lower at around $30 billion, with capital investment totalling $7.1 billion in the third quarter. Despite scaling back exploration projects, upstream production reached 2.9 million barrels of oil per day, up 3% on the third quarter of 2014. The group's divestments will lower its production performance by at least 50,000 barrels of oil per day in the fourth quarter.

In other cost-cutting measures, Shell has previously made 6,500 redundancies and another 1,000 jobs are now to go in Malaysia.

Shell's acquisition of BG is still on the cards, however, with completion on track for early 2016. Management reckon the buy will be a "springboard" to take Shell into "fewer and more profitable themes" - deep water and integrated gas, for example.

Shell's share price fell 2% to 1,704p on Thursday.

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