Royal Dutch Shell PLC said it plans even deeper cuts to its oil refining and retail operations after downstream weakness caused a 75 per cent fall in fourth-quarter profits to $1.18-billion (U.S.).
Chief executive officer Peter Voser pledged $1-billion in cost cuts and 1,000 job reductions in 2010 - mainly to come from the downstream unit - and raised his target for refinery divestments.
Europe's second-largest oil company by market value added it would continue to shift the focus of its downstream business to Asia, where rising fuel demand could ensure better profits.
Shell also affirmed its targets to grow oil and gas production, the main driver for oil companies' earnings, by 2 to 3 per cent over 2009-12, but analysts said investors' near-term focus would remain on the downstream.
"The strong growth story remains overshadowed by Shell's refining exposure," said Alexandre Weinberg, oil analyst at Petercam.
Excess refining capacity, due to lower fuel demand caused by the global recession, and new refinery startups in the Middle East and Asia, has hit crude processing margins and profits at all the oil majors.
The largest Western oil company by market value, Exxon Mobil Corp., had a 23 per cent drop in fourth-quarter net income while the second-largest U.S. oil company, Chevron Corp. had a 37 per cent drop.
However, Shell's especially large refinery portfolio and the poor quality of some of its assets has seen it hit worse than its rivals.
Finnish refiner Neste Oil and Europe's largest independent refiner, Swiss-based Petroplus on Thursday highlighted the tough crude processing environment in Europe, reporting losses.
Mr. Voser said a turnaround he launched last year was yielding dividends with $2-billion cost savings in 2009, exploration success and the startup of new projects.
After seven years of falling output, Mr. Voser predicts stable production of oil and gas in 2010 and a rise thereafter.
Some analysts believe Mr. Voser's actions will lead to stronger profit growth than its rivals in coming years.
"The stage should be set for Shell to begin a period of stronger relative performance based on delivery of restructuring benefits," said Mark Bloomfield, oil analyst at Citigroup.
However, Gordon Gray at Collins Stewart said he had reduced his 2010 earnings per share forecast by 6 per cent to reflect "persistent downstream weakness".
Excluding a charge of $1.6-billion related to one-off items, Shell's "clean" net profit was $2.77-billion, short of an average forecast of $2.87-billion from a Reuters poll of 10 analysts.
The collapse in refining margins and weaker retail profits caused a $1.76-billion loss in the downstream unit. Sharply lower gas prices meant upstream profits also fell, despite a recovery in oil prices.
Gas accounts for around 47 per cent of Shell's production, compared with around 36 per cent at larger rival BP PLC.
London-based rival BP managed to report a 33 per cent rise in profits in the quarter compared to the same period in 2008 because of its relatively low reliance on natural gas and a smaller and better quality refining portfolio.
Shell, which on Monday announced a preliminary deal with Brazil's Cosan to form a joint ethanol venture worth almost $10-billion, has steadily increased its planned scale-back in refining in the past year.
In July it said it may close or sell 8 per cent of its 3.87 million barrels per day refining capacity.
In September, Shell raised the figure to 15 per cent.
Mr. Voser said on Thursday he was still reviewing the future of 15 per cent of the portfolio, but since he said this excluded the Montreal refinery which Shell said last month it planned to convert into a fuel terminal, the latest target is equivalent to an 18 per cent reduction on the original basis.
Shell said oil and gas production fell 2.4 per cent in the quarter compared to the same period last year, to 3.3 million barrels of oil equivalent per day.