Shell beats profit expectations, rules out another mega-deal

By Ron Bousso and Dmitry Zhdannikov

LONDON (Reuters) - Refining and trading cushioned a drop in Royal Dutch Shell's first quarter profits, which fell less than expected after the collapse in oil prices slashed earnings from oil and gas output.

Europe's biggest oil company by market value also said it was still looking for acquisitions after agreeing to buy rival BG for $70 billion in the biggest oil merger of the past decade, but lacked resources to perform another mega-deal.

"We will look at anything we might be interested in ... We don't have a lot of cash left to be doing much more," Chief Financial Officer Simon Henry told a conference call.

 

Shell is working hard to execute the BG deal as soon as possible before investors in BG start to take a more critical look at the terms amid a recent recovery in oil prices.

Shell's BG deal fuelled expectations the oil industry will go through a big wave of consolidation, and earlier this week Britain warned potential suitors of BP it would oppose any takeover bid.

Shell's first quarter performance resembled those of rivals BP and Total which this week reported stronger than expected profits thanks to refining, a segment the firms have struggled to rationalise in recent years but which proved valuable in the recent oil price downturn.

By contrast Norway's Statoil , which owns little refining capacity, had a very modest uplift from downstream and reported a net loss on the back of a $6 billion non-cash writedown on its U.S. shale business.

"Our results reflect the strength of our integrated business activities, against a backdrop of lower oil prices," Shell Chief Executive Officer Ben van Beurden said.

The integrated model means control over large producing, refining and retail assets. Oil companies tend to argue that taxes represent the lion's share of the cost of fuel at the pump in the West and therefore prices of diesel and gasoline cannot decline as steeply as oil prices during market downturns.

However, Reuters calculations show that even after stripping out petroleum and value added taxes from the cost of regular gasoline in Britain, prices at the pump declined much less steeply than oil prices.

Gasoline prices excluding tax dropped by 40 percent between July 2014 and February 2015 while crude fell by 60 percent, meaning consumers did not fully benefit from the oil price decline while those who sold fuel booked healthy profits.

CAPEX CUT

Shell said lowered its 2015 planned capital investment to $33 billion from an earlier guidance of $35 billion.

The 6 percent cut is lower than its rivals in the sector which reduced 2015 upstream spending by 10 to 15 percent. In January, Van Beurden warned against over reacting to oil price falls.

"At last Shell is giving granularity for its 2015 capex guidance compared to its previous vague guidance. There is a relief that Shell is reacting to the lower prices," Raymond James analyst Bertrand Hodee said.

At 0930 GMT, Shell shares were up 0.7 percent, outperforming the broader the European oil and gas sector <.SXEP>.

Shell reported a 56 percent drop in first quarter net income at $3.2 billion, beating analysts' expectations of $2.4 billion profits.

It maintained a dividend of 47 cents per share, said it has already sold $2 billion worth of assets so far this year and added it would use BG's purchase to further streamline assets.

Profits from refining and trading, also known as downstream, rose to $2.65 billion in the first quarter of 2015 from $1.575 billion a year earlier, offsetting a sharp drop in oil and gas production earnings to $675 million from $5.7 billion.

Benchmark Brent prices averaged $55 a barrel in the first quarter of 2015, almost half the level of a year ago.

Refining margins were higher in all regions from a year earlier, Shell said, as prices of products such as diesel and gasoline did not fall as sharply as crude oil prices due to stronger demand.

"The refining boom is probably already running down in April," said Henry citing increased supplies from new refineries in the Middle East.

(Editing by Vincent Baby)