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Johannesburg - Royal Dutch Shell cut spending plans further and promised increased savings following its record purchase of BG Group as it continues to adjust to the slump in oil prices.
Europe’s biggest energy company will spend $29bn this year, it said Tuesday. That compares with a May forecast for capital expenditure “trending toward” $30bn, which was down from an earlier projection of $33bn. Synergies from the BG acquisition will provide $4.5bn in savings in 2018, up from an earlier estimate of $3.5bn.
Chief executive officer Ben Van Beurden, who staked his reputation to buy BG as oil prices sank, is promising investors higher returns and cash flows at lower oil prices as he resets the company following the $54bn acquisition. He has renegotiated contracts, eliminated thousands of jobs, maintained Shell’s asset-sale program and sought to improve efficiency to weather the oil-market slump.
“By capping our capital spending in the period to 2020, investing in compelling projects, driving down costs and selling non-core positions, we can reshape Shell into a more focused and more resilient company,” Van Beurden said in a statement.
Stock performance
Shell’s B shares, the most widely traded, have increased 11% this year in London, after a 31% gain last year. BP has risen 4.1% and Total SA 0.4%.
Brent crude, the international benchmark, has rallied about 80% from a 12-year low in January. Still, prices are less than half their level two years ago. That means companies are still having to borrow to maintain dividend payouts even after cutting billions of dollars of spending.
Shell is banking on BG’s assets to boost production and cash flow. Yet the acquisition of BG is driving up Shell’s debt gearing, which has risen above 26% from 14% at the end of last year. Debt concerns resulted in a credit-rating cut by Fitch Ratings in February, potentially increasing Shell’s cost of borrowing.
This remains a challenge for Shell. It’s still unable to cover its spending and dividend payouts with cash flows at current oil prices. Rival BP said in April it could balance its books at oil prices of $50 to $55 a barrel next year.
Cash outlook
Shell pledged to raise free cash flow to $20bn to $25bn and boost the return on capital employed to 10% by 2020 at an oil price of $60 a barrel. That compares with an average $12bn free cash flow and 8% return on capital at $90 oil from 2013 to 2015.
How successful Shell is in its $30bn asset-sale program will determine how quickly it can balance its sources and use of cash. Crude’s slump has meant oil fields are not attractive to buyers. Still, Shell plans sales in the UK North Sea and Gabon.
Shell has deepened job cuts this year as it continues to adjust to the slump in oil prices. It announced last month 2 200 more jobs will be eliminated, taking the tally of losses to 12 500 from 2015 to 2016.
