Despite High Oil Prices, Shell Gives Investors a Warning

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Europe’s largest oil company — Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) — gave its first profit warning since 2004. “It’s a shock,” Banco Santander analyst Jason Kenney told Bloomberg. Shell had “to pre-announce to get the market to reality, but even so it’s a very weak set of results.” For now, the weaker-than-expected results are by no means part of an industry-wide trend. Such an announcement is even more surprising because profit warnings are generally rare for oil producers, companies that investors value for their slow but steady growth.

Still, the announcement is an inauspicious start to the earnings season for energy producers. The price of Brent crude prices, the benchmark for more than half the world’s oil, dropped 0.3 percent in 2013, the first time since 2008 that global oil prices did not increase. But despite relatively high and stable oil prices, Royal Dutch Shell had numerous issues in 2013.

The fourth-quarter’s weak performance had its origins in numerous aspects of the oil producer’s business. For the poor results, Shell blamed higher exploration costs, lower volumes of natural gas and oil, and “weak industry conditions in downstream oil products,” including refining. As investors in the company and oil industry analysts well known, the overarching problem with Shell is its cost structure — meaning the expenses the company incurs during the production of oil and natural gas. The problem is by no means a new one for Shell, but it does mark the first occasion newly appointed Chief Executive Ben van Beurden has addressed the issue.

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