LONDON • Oil giant Royal Dutch Shell, which expects to take over BG Group for US$47 billion (S$67 billion) - the industry's largest deal in a decade - says fourth-quarter profit will likely drop at least 42 per cent after the rout in crude prices deepened.
Profit after adjusting for inventory changes and one-time items probably shrank to US$1.6 billion to US$1.9 billion (S$2.3 billion to S$2.7 billion), Shell said yesterday in a preliminary earnings statement, ahead of a shareholder vote on the BG deal.
That compares with the US$1.8 billion average estimate of nine analysts surveyed by Bloomberg, and profit of US$3.3 billion a year earlier. BG also published a provisional results statement that showed its 2015 oil and natural gas production will probably beat forecasts.
Crude's collapse below US$30 a barrel has driven down Shell's market value to the lowest in almost seven years and prompted concern that it may be overpaying for BG's production and cash flow.
Shell has prepared for a prolonged market slump by cutting jobs and spending. Job losses at both companies in 2015 and 2016 will exceed 10,000, including 2,800 after the combination takes effect, said chief executive Ben Van Beurden.
"Bold, strategic moves shape our industry," Mr Van Beurden said in the statement. "The completion of the BG transaction, which we are expecting in a matter of weeks, will mark the start of a new chapter in Shell, to rejuvenate the company, and improve shareholder returns."
Shell has justified the BG deal by saying it boosts its ability to maintain dividends, makes it the world's biggest liquefied natural gas (LNG) company and gives it oil and gas assets from Australia to Brazil.
Shell expects to earn US$400 million to US$500 million from its oil and gas production and LNG businesses in the fourth quarter. That includes US$1.6 billion to US$1.9 billion from the gas division, meaning the company will probably report a loss from oil, said Mr Richard Griffith, a London-based analyst at Canaccord Genuity. "The surprise is how strong the integrated gas business has been. That's a point Shell wants to make because the BG deal is the combination of two powerful gas companies," he said.
Aberdeen Asset Management and Invesco Asset Management, two of Shell's major shareholders, have said they will support its plan to buy BG even with crude's fall.
Norway's US$790 billion sovereign wealth fund, the world's largest, will vote in favour of the merger It is Shell's fifth-biggest investor with a stake of 2.46 per cent, and BG's second-biggest investor with a stake of 3.73 per cent.
The acquisition allows The Hague- based Shell to accelerate the reshaping of its portfolio towards deepwater assets and gas, and BG's production is likely to grow strongly in the next three to five years, Invesco fund manager Martin Walker said.
Standard Life Investments is the only Shell holder that has so far publicly said it will vote against the combination because the acquisition is "value destructive".
BG, the third-biggest oil company in Britain, said output last year probably averaged 704,000 barrels of oil equivalent a day, exceeding its forecast of 680,000 to 700,000 barrels a day. It expects to report full-year adjusted earnings of about US$1.7 billion, excluding earnings from asset sales, on Feb 5. It had profit of US$4 billion in 2014.
It said it is taking a net charge of about US$700 million in the fourth quarter to include non-cash post- tax impairment charges primarily because of the slump in oil and gas prices and a revision of reserves at various assets.
BLOOMBERG
