Shell braces for 'lower forever' oil as profits soar

LONDON (Reuters) - Royal Dutch Shell RDSa.L is gearing up for a world of "lower forever" oil prices, its Chief Executive Ben van Beurden said on Thursday, after the company's profits tripled in the second quarter.

Staff members work at the booth of Royal Dutch Shell at Gastech, the world's biggest expo for the gas industry, in Chiba, Japan, April 4, 2017. REUTERS/Toru Hanai

The oil and gas industry has struggled with three years of weak prices while also facing the prospect of oil demand plateauing by the end of the next decade.

But Europe’s largest energy company was able to boost its profits more than expected, increase cash flow to $12.2 billion and reduce debt thanks to asset sales and as big savings introduced since the oil price collapse kicked in.

But Shell’s oil and gas production dipped versus the previous quarter as a result of reduced output from a facility in Qatar.

Van Beurden said with oil prices hovering around $50 a barrel and forecasts of only a modest recovery by the end of the decade, Shell was not planning to stop its cost cutting drive.

It was now “getting fit” to be profitable in a world where oil trades at $40 a barrel, he said.

“The external price environment and energy sector developments mean we will remain very disciplined.”

Shell is one of the top three picks of analysts that cover global oil companies, together with Chevron CVX.N and Total TOTF.PA, Reuters data shows.

Shell’s “performance is beginning to show the underlying potential of Shell’s ability to generate operating cash flows in the current oil price environment,” Brendan Warn, analyst at BMO Capital Markets, said. BMO has an “outperform” recommendation on Shell.

Shell's shares were up 0.3 percent at 1404 GMT, outperforming the broader index .SXEP, which was down 0.5 percent.

Shell's European rivals Total and Statoil STL.OL also beat analyst forecasts on Thursday.

Shell reiterated its plans to spend around $25 billion this year, at the lower end of its long-term range, but said it could cut further if needed.

Net income attributable to shareholders in the second quarter, based on a current cost of supplies and excluding exceptional items, rose 245 percent to $3.6 billion, topping a company-provided analyst consensus of $3.15 billion.

The rise in profits was driven mostly by refining and chemicals.

First-half cash flow rose seven fold to $20.8 billion from a year earlier.

Oil and gas production in the second quarter declined to 3.495 million barrels of oil equivalent per day (boed) from 3.752 million boed in the first quarter.

Its disposal program over the past two years could further impact production growth. Shell expects a 240,000 barrel-per-day year-on-year fall in third-quarter production due to divestments in Malaysia and Australia and the separation of its Motiva asset in the United States.

Shell said its debt stood at $78 billion. Its debt to equity ratio fell for a second consecutive quarter to 25.3 percent from a peak of 29.2 percent in the third quarter of 2016 that followed its $54 billion acquisition of BG Group.

Reporting by Karolin Schaps and Ron Bousso; Editing by Jason Neely and Jane Merriman