Royal Dutch Shell PLC, which rivals BP PLC as Europe's largest oil company, on Thursday reported disappointing fourth quarter earnings due to a weak refining business, and said it will freeze its dividend in 2010 and cut 1,000 more jobs.
Net profit was $1.96 billion, compared with a loss of $2.81 billion in the same period a year ago, when the company took a multibillion dollar writedown on the value of its inventory after a sharp fall in the price of oil.
Stripping out the inventory effect, however, profit fell 75 percent to $1.18 billion from $4.79 billion.
"We are facing challenging market conditions," Chief Executive Peter Voser said on a conference call. "Especially downstream (in refining) and natural gas, despite the headline increase in oil prices, and the outlook for 2010 remains difficult."
Shell produces about equal amounts of oil and gas, and while oil prices rose from the fourth quarter of 2008, a sharp decline in natural gas prices meant that Shell's combined selling prices actually fell. In addition, its combined production dropped by 2 percent to 3.33 million barrels per day.
As a result, the company's production arm saw profits fall 46 percent in the fourth quarter to $2.54 billion, due partly to a one-time gain of $1.4 billion in the same period a year earlier.
Shell's refining division posted a loss of $1.76 billion, from a profit of $561 million, as intake fell and margins worsened. Voser cited a fall in demand in line with the economic slowdown.
Shares in the company fell 1.7 percent to euro20.04 in early trading in Amsterdam.
"Refining clearly is the negative story of this reporting season for majors and has taken its toll across the board," said analyst Alexandre Weinberg of Petercam Bank.
He said Shell is in a good long-term position as the company has invested heavily in developing new oil fields in recent years to turn around a decade of production declines.
But Voser said Thursday he expects production to remain about flat in 2010 and new fields will only really begin adding to production in 2011.
"As such, the catalysts for the stock in the coming months will be an improvement in refining conditions or reduction in exposure," analyst Weinberg said.
Voser said the company was looking at selling some 15 percent of its refining operations, but defended the business as part of the company's long-term integrated structure.
He noted that a quarter of the company's projected $28 billion in 2010 capital expenditure would be on refining projects, notably in Singapore, with the rest to production projects.
The best refining opportunities are "more in the East than they used to be in the past," he said "So we are streamlining our European portfolio to a certain extent, and we are streamlining the Americas portfolio."
Similarly, Shell said the company has no plans to leave Nigeria, where it has suffered problems for years due to attacks on its facilities from rebels in the Niger Delta demanding a larger share in profit. At the moment the company is producing 250,000 barrels per day in Nigeria, only half of its potential.
"I'll make it very clear...Nigeria is part of the portfolio," Voser said.
Voser said moves in October 2009 to cut costs, including shedding 5,000 jobs, or 5 percent of Shell's work force, have led to $2 billion in annual savings on operating costs.
He said the company plans to cut an additional 1,000 jobs in 2010, mostly at its refining operations, and to save another $1 billion in costs.
He defended a decision to keep the company's dividend at $0.42 per share in 2010.
"There's hardly any inflation around in the world, so in that sense, 42 cents is actually the way we've driven our policy in the past," he said.
"I think this is the right way to go forward, given the macro environment, but also given our cash flow."
Chief Financial Officer Simon Henry also defended Shell's relatively large exposure to gas markets, noting that less than two years ago Europeans were worried about gas supply problems and potential price spikes.
"We are very much of the view that if you look through the cycle, demand for gas will grow," he said.
"The climate change outcome from Copenhagen we actually see as positive in terms of the impact on gas demand going forward, gas being very much part of a lower carbon future."
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