Shell Doesn’t Expect ‘Quick’ Recovery in Demand as Net Falls

By Fred Pals

Oct. 29 (Bloomberg) -- Royal Dutch Shell Plc, Europe’s largest oil company, reported a 62 percent plunge in third- quarter earnings and said a “quick recovery” in energy demand and prices is unlikely.

Net income fell to $3.25 billion from $8.45 billion a year earlier, The Hague-based company said in a statement today. The shares slid the most in almost three months in London trading.

Chief Executive Officer Peter Voser said the outlook “remains very uncertain” given forecasts that demand for crude will fall the most this year since 1980. Shell is cutting 5,000 jobs, equivalent to about 5 percent of its workforce, and has reduced operating costs by about $1 billion to counter a slump in demand for fuels to run cars and factories.

“Shell reported a bad upstream result which was offset by a good downstream performance,” said Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking NV. “On a positive note, Shell is flagging big cost savings,” said Kenney, who has a “hold” rating on the stock.

Shell will be followed by results for Exxon Mobil Corp., the largest U.S. company, later today and Chevron Corp. tomorrow.

Eni SpA, Italy’s largest energy company, today reported a 58 percent slump in quarterly profit to 1.24 billion euros ($1.82 billion). BP Plc, Europe’s second-biggest oil company, reported earnings that beat estimates earlier this week after beating its own cost-savings target by $1 billion.

Shares Drop

Shell fell as much as 3.7 percent in London trading and was down 65 pence at 1,846 pence as of 8:15 a.m. local time. The stock is up 2.4 percent this year, underperforming a 10 percent advance for BP.

Excluding one-time items and inventory changes, Shell’s earnings were $2.62 billion, narrowly beating the $2.5 billion- median estimate of 10 analysts compiled by Bloomberg. It’s the third straight quarter that Shell has surpassed analyst estimates on this profit measure.

Voser, who took over from Jeroen van der Veer in July, has already started to streamline Shell’s operations. Three units have been consolidated into two, focused on the Americas and the rest of the world, almost two years after a similar reorganization by BP.

The company has already reorganized its management structure by cutting 20 percent of senior jobs to 600 positions. More employees have been asked to reapply for their jobs as part of the internal shake-up, Voser said earlier this month. Global oil demand will fall by more than 2 million barrels a day this year, Voser said in July. European gas consumption will drop by 5 percent, he said.

Oil Drop

The average gas price plunged 62 percent in the third quarter from a year earlier. U.S. oil futures, which touched a record $147.27 a barrel in July 2008, averaged $68.24 in the three months ended Sept. 30.

Third-quarter production was little changed at 2.926 million barrels of oil equivalent a day with crude oil production falling by 2 percent and production up about 3 percent.

Shell is tapping unconventional deposits from Qatar to Canada to revive production growth after six years of falling output. Record investment in 2009 let Voser expand an oil-sands venture in Canada and deepwater projects in the Gulf of Mexico and Brazil. Shell, the biggest non-state liquefied natural gas producer, in September decided to go ahead with the Chevron-led Gorgon LNG project in Australia.

Production Forecast

Shell aims to add 1 million barrels a day to capacity by the end of 2012, representing an average annual growth rate for oil and gas output of 2 percent to 3 percent between 2009 and 2012. That compares with growth of 1 percent to 2 percent at BP. Both estimates take into account the impact of natural field depletion.

OAO Gazprom and Shell are increasing capacity at the Sakhalin-2 liquefied natural gas plant in Russia and are on target to ship about 55 fuel cargoes this year.

Shell and Anadarko Petroleum Corp., the second-largest producer of natural gas in the U.S., in July said they made a discovery at the Vito exploration oil well in the Gulf of Mexico. Shell holds 55 percent of the project.

Shell’s output is set to benefit from the amnesty declared by Nigerian President Umaru Yar’Adua for militants in the oil- producing Niger Delta, whose attacks have disrupted exports.

Shut Plants

Shell has been forced to shut plants in Nigeria, cutting oil production to 121,000 barrels of oil equivalent a day, down from 144,000 barrels in the first three months of the year, Shell said Oct. 13. In 2004-2005, Shell pumped as much as 1 million barrels a day from the West African nation’s fields along with its partners.

In July, Shell started production at its BC-10 field in Brazil, which will have capacity of 100,000 barrels of oil equivalent a day.

Refining margins, or profits from turning crude into fuels, slid about 57 percent in the third quarter from a year earlier, according to BP. Its Global Indicator Margin, a broad measure of refining profitability, declined to $3.42 a barrel from $8 a barrel.

Shell reported its earnings under three business segments, upstream, downstream and corporate to underline its new management structure.

To contact the reporter on this story: Fred Pals in Amsterdam at fpals@bloomberg.net