At 07.00 this morning Shell issued a profit warning. Just twelve working days since taking up his post as new CEO of Shell, Ben van Beurden has had to say “Our 2013 performance was not what I expect from Shell”. The company made $27.2bn in 2012, it looks likely to make only $16.8bn in 2013 – this is a drop of over $10bn – over 30% of the previous years profits.
Van Beurden was a surprise victor in the 2012 race to become CEO of Shell – most observers in the finance sector thought the crown would go to Simon Henry, the long running Chief Financial Officer. Certainly Simon Henry was very much in evidence at the Shell AGM in May 2012, and van Beurden kept a low profile. The choice of the new CEO was seen widely as one more blow to the British staff in the company and another victory for the Dutch in the decades long struggle between the two sides. However, van Beurden must now be feeling unhappy to have to deliver this bad news as his opening statement. All the board must have known that some kind of storm like this was coming, especially Simon Henry who has the closest view of the finances – perhaps he’s feeling happy to have avoided this indignity?
The reasoning given for the profit warning include the increasingly familiar line about ‘security problems in oil-rich Nigeria’. However the security situation in the Delta is not nearly as severe as it was in the late 2000’s and the impact on profits seems far smaller. It’s possible that this line, also used by former CEO Peter Voser in the Q3 results statement in autumn 2013, is about Shell wanting to pressure the Nigerian Government for a more favourable tax regime in the long-delayed Petroleum Law. What is clear is that Shell’s current strategy in Nigeria isn’t working.
Most significant is the line ‘higher exploration costs’. Will this lead to Shell reviewing some of it’s high cost and high risk projects – such as the assets in the Chukchi Sea in the Alaskan Arctic? These vastly expensive ventures, not only threaten the ecology of the Arctic and the Inuit communities, but also threaten shareholders capital. The shareholders should use this profit warning to demand greater capital discipline from the board, asking for the company to return capital to stock holders rather than risk it on ventures such as those in the US Arctic.
Only six weeks ago Shell cancelled a $12.5 bn gas-to-liquids plant in Ascension Parish, Louisiana saving the Mississippi river between Baton Rouge and New Orleans from yet more toxic pollution.In cancelling the project CEO Peter Vosser commented, “we are making tough choices here, focusing our efforts and capital on the most attractive opportunities in our world-wide portfolio, to add value for shareholders.” Van Beurden should now take the opportunity of the 4th Quarter Results announcement in two weeks time to save another part of America from decades of industrialisation, and apply the same reasoning used in Louisiana. He should call a halt to the Arctic projects and mark a bold shift in direction from that initiated by his predecessor CEO, Jeroen van der Veer.
There are huge question marks over the economic viability of Shell’s Arctic plans given the high costs involved. The fact that Shell’s profits are tumbling, in part because of high exploration costs, highlights further the need for investors to make sure that the sums add up in the case of the Arctic.