Shell Profit Drops, to Cut 6,500 Jobs -- Update

By Sarah Kent 

LONDON-- Royal Dutch Shell PLC announced plans to slash 6,500 jobs Thursday amid a slump in oil prices that has sent a wave of job cuts rippling through the industry.

Shell's job reductions came as Chevron Corp. said Wednesday it would cut 1,500 jobs, while U.K. utility Centrica PLC said Thursday it would slash 6,000 positions and work to shrink its oil-and-gas production division. Even deeper cuts have emerged this week at oil services firms, which big energy companies are squeezing for savings; Saipem SpA of Italy, for instance, said it would slash 8,800 jobs over the next two years.

The moves demonstrate how oil companies' previous measures to deal with the oil market collapse weren't enough and how they are preparing for a prolonged downturn in crude prices. Shell, BP PLC, and France's Total SA have all outlined plans in their second quarter results to deepen spending cuts that began earlier this year when oil prices reached lows below $50 a barrel, down from highs of $114 a barrel last year.

After briefly rebounding into the $60s, prices have plunged again in recent weeks, hovering below $50 a barrel for WTI crude and just above for Brent, the global benchmark.

Shell's job cuts were announced along with second-quarter earnings that saw its profit fall by 33% from the same period last year, to $3.4 billion compared with $5.1 billion on a current cost of supplies basis--a measure similar to the net income reported in the U.S. As with its peers, Shell's exploration and production, or upstream business, suffered most, tumbling to $774 million, down nearly 80% from a year earlier. Shell's oil production fell 11% to 2.7 million barrels of oil equivalent as the company undertook maintenance at several fields and continued a $20 billion divestment program due to complete at the end of the year.

Shell has been more bullish, at least in its rhetoric, on the future of the oil price than peers such as BP. The company sounded a somewhat more cautious note on Thursday, saying in a news release that it was planning for an "oil price downturn [that] could last for several years."

"We have to be resilient in a world where oil prices remain low for some time, whilst keeping an eye on recovery," Shell Chief Executive Ben van Beurden said. "We're taking a prudent approach, pulling on powerful financial levers to manage through this downturn, always making sure we have the capacity to pay attractive dividends for shareholders."

Still, the Anglo-Dutch giant has acted boldly in recent months. In April it signed a $70 billion deal to acquire BG Group--the company's largest purchase ever and the biggest deal in the oil sector for more than a decade--and it is pressing ahead with expensive plans to drill in the Arctic this summer. While others have delayed approval of big ticket projects, earlier this month Shell decided to move forward with the development of its deep-water Appomattox oil field in the Gulf of Mexico.

The company said it remained committed to its dividend program, confirming payouts at $1.88 a share in 2015 and at least as much again in 2016.

Investors seemed to react well to the cost-reduction plans. Shell's share price rose more than 2% in London following the announcement.

Among the other cuts, Shell said it would make reductions in its operating costs by $4 billion this year and lower capital investment by 20%.

The moves echo similar cutbacks by its peers. Earlier this week BP said it would spend less than $20 billion in organic capital expenditure this year after swinging to a $6.3 billion loss on low oil prices and a multibillion-dollar charge relating to its 2010 blowout in the Gulf of Mexico. Total said its aggressive cost-cutting contributed to its net profit fall by just 4% in the second quarter compared with a year earlier, boosted by higher production and a wide-ranging push to lower spending.

The company said it remains on track with its plan to combine with BG Group. It has already received regulatory approval from the U.S., Brazil and South Korea, but still needs to get a nod from Australia, China and the European Union.

Though most analysts have praised the logic of the deal--which will give Shell a major footprint in Brazil's attractive deep-water oil plays and enhance its leading position in the liquefied natural gas market--the price has come under criticism and some have expressed concerns that it depends too much on an oil price recovery. Shell said the synergies from the deal should amount to at least $2.5 billion a year from 2018. Over the medium term, the company still sees the potential for the oil price to return to $70 to $90 a barrel.

Write to Sarah Kent at [e-mail]

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