Last updated: August 1, 2013 6:14 pm

Shell takes impairment on North America as profit slides

NIGERIA-OIL-CRIME©AFP

Royal Dutch Shell took a big writedown on the value of North American shale assets, which combined with trouble in its Nigeria operations to wipe a fifth off its quarterly profits.

The Anglo-Dutch oil and gas group also said it was dropping its oil and gas production growth targets, in a sign of how difficult it is becoming for supermajors such as Shell to increase output and reserves.

The results highlight the challenges facing new chief executive Ben van Beurden, as he gears up to replace outgoing boss Peter Voser at the start of next year.

At the top of the list is the poor performance of Shell’s North American exploration and production business, which suffered a loss in the quarter and is expected to remain in the red for the rest of this year and possibly longer. The losses show Shell’s multibillion-dollar bet on US shale gas and tight oil has yet to pay off.

Shell said profits slid to $4.6bn, from $5.7bn a year ago. The news sent its shares down 4.7 per cent to £21.33.

Mr Voser said earnings were hit by higher costs, exploration charges, adverse currency exchange rate effects and challenges in Nigeria, where oil theft and disruptions to gas supplies are playing havoc with oil operations in the Niger Delta. But even setting aside those factors, the results were “clearly disappointing for Shell”, he said.

Production was 3.062m barrels a day, a decrease of 1 per cent on a year ago. Shell said the worsening situation in Nigeria impacted production volumes by some 100,000 b/d.

Shell said it had taken impairments of $2.1bn in the quarter, mostly related to its tight oil assets in North America. Several oil companies have written down the value of their US shale gas interests, reflecting lower gas prices as a result of the shale boom, but writedowns of liquids rich shales – a sector that has been booming in recent years – are rarer.

Meanwhile ExxonMobil, which also reported on Thursday, was more upbeat about prospects for the sector. David Rosenthal, Exxon’s vice-president, said the company’s unconventional liquids production in North America was ramping up, and offsetting declines in conventional fields.

Shell’s decision to drop production targets was also a surprise. The company had said it was aiming to increase oil and gas output to 4m barrels a day by 2017-18. This has now been “retired”, Mr Voser said.

He said production targets had only ever been a “proxy for financial performance”, and shareholders were “more happy” with purely financial targets. He reiterated that Shell planned to generate $175bn-$200bn of cash flow in the 2012-15 period and was starting up five big projects in the next 18 months that should add more than $4bn to 2015 cash flow.

But some said even meeting its financial objectives might prove difficult. “Losses and writedowns in North America look to make [cash flow] target delivery a challenge,” Citigroup analysts said.

Additional reporting by Michael Kavanagh

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