Resource companies measure out their lives in decade time scales. On that basis, the world is Shell’s oyster. Eight years after 2004’s reserves accounting debacle, the Anglo-Dutch oil major is sitting pretty with one of the best long-term stories in the business. Its exploration and production assets and technical knowhow are world class. Its growth projects — in deep water oil, offshore liquid natural gas and other unconventional fields — are attractive. The snag is that Shell is struggling to meet short-term expectations.
A big earnings miss in the second quarter —net income on the industry’s standard measure was $5.7 billion, $600 million shy of forecasts — is only partly explained by the recent slide in oil prices. The fact that Shell fell so far short is embarrassing, not least as most analysts had already cooked lower crude into their models. After disappointing some investors by not hiking its dividend as much as hoped in Q1, management has some explaining to do.
“The cheque’s in the mail” is a clichéd excuse, but apposite in Shell’s case. Delayed dividend payments from liquefied natural gas affiliates in Asia that Shell doesn’t directly control knocked $200 million off the year-on-year performance. They should now flatter next quarter’s results. But a weak performance in North America, were where prices Shell received for natural gas and synthetic crude fell a respective 52 per cent and 19 per cent year-on-year, was the biggest negative surprise, say analysts at Bernstein. Maintenance downtime and interruptions from a shift from drilling gas-rich to oil-rich onshore wells were also factors, despite planned maintenance work being well-flagged for the quarter.
Of course, Shell can argue there’s only so much it can do to communicate the trajectory of its business between formal reporting periods. The market must form its own view based on industry margins, oil price movements and the maintenance and other one-offs disclosed in quarterly filings. Still, after a period in which Shell’s stock has outperformed industry peers, the 3.5 per cent slide in the London-listed shares shows that this widely covered business is more than just a proxy for the oil price. Perhaps Shell needs to do more to ensure its increasingly complex business is understood. Myopic markets won’t stay patient forever, no matter how good the long-term story.
