Shell misses forecasts as its takes North America impairment.

Shell misses forecasts as its takes North America impairment.
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Royal Dutch Shell said second-quarter earnings fell 20 per cent, as
trouble in Nigeria hit production and the company took a big
impairment on its North American shale assets.
The company also said it was dropping its oil and gas production
growth targets, in a sign of how difficult it is becoming for
supermajors such as Shell to increase output.
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Shell said profits slid to $4.6bn, from $5.7bn a year ago. The news
sent shares down 5.4 per cent in early afternoon London trading to
£21.18.
The results highlight the challenges facing new chief executive Ben
van Beurden, as he gears up to replace outgoing boss Peter Voser at
the start of next year. At the top of the list is the poor performance
of its North American business, which suffered a loss in the quarter
and is expected to remain in loss for the rest of 2013 and possibly
longer.
Analysts were also worried about the fall in operating cash flow,
which was $12.4bn compared with $13.3bn a year ago. Citi analysts said
Shell's first-half cash flow, pre-working capital, was "insufficient"
to fund both planned capital expenditure and the dividend.
Mr Voser said Shell's profits had been hit by higher costs,
exploration charges, adverse currency exchange rate effects and
challenges in Nigeria. But even setting aside those factors, the
results were "clearly disappointing for Shell", he said.
Shell said the results also reflected the impact of the weakening
Australian dollar on a deferred tax liability. They were also affected
by higher operating expenses and depreciation as well as the increased
exploration well write-offs.
But Mr Voser singled out the deteriorating operating environment in
Nigeria, where oil theft and disruptions to gas supplies were causing
widespread environmental damage and could cost the Nigerian government
$12bn in lost revenues per year.
Oil and gas production was 3.062m barrels a day, a decrease of 1 per
cent. Shell said the worsening situation in Nigeria impacted
production volumes by some 100,000 b/d.
Shell said it had taken impairments of $2.1bn in the quarter,
predominantly related to its tight oil assets in North America.
Several oil companies have written down the value of their US shale
gas interests, reflecting lower gas prices as a result of the shale
boom, but writedowns of liquids rich shales – a sector that has been
booming in recent years – are rarer.
Simon Henry, chief financial officer, said the impairment highlighted
what Shell had learnt from exploratory drilling carried out over the
past two years and "the fact that the production curve is less
positive than we originally expected," he said. But he emphasised that
Shell was producing 50,000 b/d from its liquids-rich assets, from zero
two years ago.
The $2.1bn impairment also reflected the fact that Shell had had to
carry out "quite significant well write-offs" in the second quarter of
about $600m, Mr Henry said.
Shell said it had launched a strategic review of its portfolio of
North American shale and onshore Nigeria assets. Mr Voser said the
company planned to halve the number of areas it operates in North
America, which currently stand at nine. It wanted to divest some
small-scale properties in the US which "are still prospective and can
produce, but do not have the size we are looking for," he said.
The dropping of Shell's production target was also a surprise. The
company had said it was aiming to increase oil and gas output to 4m
barrels a day by 2017-18. This has now been "retired", Mr Voser said.
He said production targets had only ever been a "proxy for financial
performance", and shareholders were "more happy" with purely financial
targets. He reiterated that Shell planned to generate $175-200bn of
cash flow in the 2012-15 period and was starting up five big projects
in the next 18 months that should add more than $4bn to 2015 cash
flow.
But some said even meeting its financial objectives might prove
difficult. "Losses and writedowns in North America look to make [cash
flow] target delivery a challenge," Citigroup analysts said.

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