LONDON (Reuters) - Royal Dutch Shell’s (RDSa.L) 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.
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.
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 (BP.L), which took a direct hit from the Gulf of Mexico oil spill in that month.
GRAPHIC on Shell vs its peers link.reuters.com/ren85v
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