Shell to exit up to 10 countries after BG deal

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Shell to exit up to 10 countries after BG deal

2:34 CAT | 07 Jun 2016

Reuters / Ben van Beurden, chief executive officer of Royal Dutch Shell, listens to a question during a news conference in Rio de Janeiro, Brazil, February 15, 2016.

Royal Dutch Shell said today it would sell up to 10% of its oil and gas production, leaving up to 10 countries to cut costs following its $54 billion acquisition of BG Group.

The Anglo-Dutch company outlined plans to keep annual spending below $30 billion until the end of the decade and increase savings from the integration to $4.5 billion.

Shell, the world’s second largest oil and gas company, will be hoping the new cuts will help boost its shares, which have underperformed rivals since the BG deal was announced in April 2014.

Shell’s chief executive Ben van Beurden said the company would focus its short-term growth on deepwater projects in Brazil and the Gulf of Mexico as well in chemical projects in the US and China.

Shell also gave the go-ahead for investing in a new cracker and polyethylene plant in the US, one of a handful of investment decisions it will make this year as it grapples with the sharp drop in oil prices over the past two years.

In the long term, the company said it would target shale oil and gas production in North America and Argentina as well as renewable energies, hydrogen, solar and wind.

It did not say which countries it might exit.

Shell said the savings and asset sales could lead to a return on capital employed of some 10% by the end of the decade, assuming a $60 oil price, compared with an average of 8% between 2013 and 2015.

Shell has vowed to make itself leaner and more efficient in the wake of the BG deal, often citing its smaller rival’s operations as a model.

A main source for cost cuts, including 12,500 job reductions this year, would come from significant overlaps in operations in key areas including Australia, Brazil and the North Sea.

Shell said it would keep annual spending below $30 billion until the end of the decade and cut its planned 2016 capex for a third time to $29 billion, down from an initial $35 billion.

It also vowed to save as much as $4.5 billion in costs related to the BG integration by 2018, up $1 billion from previous guidance.

“Our strategy should lead to a simpler company, with fundamentally advantaged positions, and fundamentally lower capital intensity. Today, we are setting out a transformation of Shell,” van Beurden said.

Shell’s shares were up 1.5 percent shortly after market open.

Shell said savings and asset sales could increase returns on capital employed to shareholders to around 10 percent by the end of the decade, assuming an oil price of $60 per barrel, up from around 8 percent between 2013 and 2015.

A main source for cost savings, including 12,500 job cuts this year, will come from significant overlaps in operations in areas including Australia, Brazil and the North Sea.

“Overall, we read the statement as positive, and expect Shell to reverse some of its underperformance versus peers in recent days,” said Biraj Borkhataria, analyst at RBC Capital Markets, who holds an “outperform” rating on Shell’s stock.

Country exits

Shell will also expand its chemicals business, particularly in the United States and China.

It also gave the go-ahead for investing in a new cracker and polyethylene plant in the United States, one of a handful of investment decisions it will make this year as it grapples with the sharp drop in oil prices over the past two years.

Shell will slow its new investment in its integrated gas business, which includes its liquefied natural gas (LNG) operations, which has “reached critical mass following the BG acquisition”.

The merger makes Shell the world’s second biggest international oil company behind Exxon Mobil and the top LNG trader.

In the long term, the company said it would target shale oil and gas production in North America and Argentina as well as renewable energies hydrogen, solar and wind.

Shell plans to sell $30 billion worth of assets around the world by around 2018 and quit operations in 5 to 10 countries to reduce its balance sheet gearing which soared to 26 percent following the BG deal. It also has announced it plans to implement a share buyback program.

It did not say which countries it might exit. Reuters has reported that Shell plans to sell its assets in Gabon.

Shell targets $6-$8 billion in sales in 2016. Chief Financial Officer Simon Henry said the company expects to make at least $3 billion mainly from downstream disposals this year as refining, infrastructure and retail are more immune to oil price fluctuations.

However, sales of oil and gas production assets have dropped through the downturn amid high oil price volatility.

Source: Reuters