Shell yield tops 10% as oil plunges

A fresh slump in oil prices Wednesday accompanied trading updates from merger hopefuls Royal Dutch Shell and BG Group. A week before shareholders get to vote on one of the biggest industry mergers in years, Brent crude skidded back to $30 a barrel, near a 12-year low. Now, Shell warns that profits plunged in 2015.

That's really no surprise, given oil prices have been in freefall since June 2014. Neither is the share price slump to seven-year lows. Shell chiefs say results on 4 February will confirm fourth-quarter profit of $1.6-$1.9 billion (£1.1-£1.3 billion) on a current cost of supplies (CCS) basis. A year ago it made $3.3 billion.

Yesterday, we reported that Deutsche Bank had pencilled in headline net income of $1.7 billion (£1.2 billion) in the three months to December. City consensus estimates were for $2 billion.

Shell says its upstream division - exploration and production, or E&P - will actually make $0.4-$0.5 billion, a little more than expected. Downstream - refining and processing - will be slightly lower than anticipated at $1.4-$1.6 billion versus Deutsche's estimate of $1.7 billion and consensus of $2 billion.

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Quarterly production is put at 3 million barrels of oil equivalent per day (boe/d) and, for the full year 2015, 2.9 million boe/d, a little light compared with market forecasts.

For the full-year, Shell guides to $10.4-$10.7 billion of earnings, and repeated its promise to pay a dividend worth $1.88 per share - $12 billion in 2015 - both this year and next. On this basis, Shell currently offers a yield of a colossal 10.2%.

And, as boss Ben van Beurden points out, Shell cut operating costs by $4 billion, or 10%, in 2015. Expect a further $3 billion this year, plus more from the BG deal. Capital investment was slashed by $8 billion, or over 20%, last year, and the $33 billion the merged company expects to spend in 2016 is down 45%. There's also $30 billion of assets to be sold in 2016-2018 on top of the $20 billion of disposals already in the can.

BG

Numbers at BG were better. Chief executive Helge Lund actually expects to unveil results in line with, or ahead of guidance for the year.

"Ramp up of both liquefied natural gas (LNG) trains at our Queensland Curtis LNG (QCLNG) project in Australia and the start-up of our sixth floating production, storage and offloading (FPSO) [unit] in Brazil drove a strong E&P operational performance, while our LNG Shipping & Marketing business delivered 282 cargoes, an increase of 58% on 2014, in difficult market conditions."

Average E&P production was 704 thousand barrels of oil equivalent per day (kboed) in 2015, up 16% on last year and ahead of guidance of 680-700 kboed. Upstream cash profit was "at least" $4.1 billion.

Total results earnings are put at a minimum of $2.3 billion, which will include a post-tax gain of at least $0.6 billion from disposals, re-measurements and impairments.

Shell shareholders vote on the proposed merger with BG on 27 January. BG shareholders get their chance a day later.

Detailed full-year results will be confirmed in a further statement a week after the shareholder vote.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.