Friday, 17 January 2014

Royal Dutch Shell trading statement






Royal Dutch Shell a global group of energy and petrochemical companies. I have a holding in my income portfolio (epic code: RDSB)



Shell issued a trading statement ahead of its full year earnings due to be announced on 30 January, in what can only be described as a severe profits warning.


Management state that the fourth quarter is expected to be significantly lower than recent levels of profitability, due to the current oil and gas prices and the downstream oil products industry environment.  One could have also added - due to management's inability to ration investment to high return projects. 


Shell's fourth quarter 2013 earnings on a current cost of supplies basis excluding identified items are expected to be approximately $2.9bn compared to $5.6bn last year and a market expectation of $5.1bn, blaming weak industry conditions in downstream oil products, higher exploration expenses and lower upstream volumes.  After identified items Fourth quarter 2013 CCS earnings are expected to be approximately $2.2bn


Full year earnings on a CCS basis excluding identified items are expected to be $19.5bn compared to $25.3bn last year.  After identified items full year 2013 CCS earnings are expected to be approximately $16.8bn.


The closest investors came to expecting problems in the fourth quarter, was a comment by the previous CEO Voser at the time of the third quarter announcement on 31 October:


"...We are facing headwinds from weak industry refining margins, and the security situation in Nigeria, which continue to erode the near term outlook...". 


Under the FCA's Disclosure and Transparency Rules, it is a duty of management to  release relevant information as soon as it is available and; all those who want to deal in shares should have access to the same information at the same time.  Which would imply that the management of Shell were unaware that earnings for the fourth quarter were going to be substantially (43%) short of market expectations until a few weeks after the quarter end.  This is either a sad reflection on the competence of Shell's management or a blatant disregard for the Listing Rules.


The new CEO van Beurden has a lot "on his plate" to improve Shell's performance, so that it meets tactical and strategic targets.  This will require more insightful decision making from the management team, with respect to the allocation of funds to high value generating projects.


Some have commented in the press that this is a "kitchen-sink" approach to the results, to clear the decks for the new CEO.  Which is a bit rich if it is, as he was already part of the management team that are responsible for the result.  We will know a little more at the time of the full results on 30 January, as it will become apparent how much of the miss is cash related.

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