Shell says BG takeover will make an extra $1bn in savings as it cuts costs further

Energy giant announces capital spending to be capped at $29bn to 2020

Rakteem Katakey
Tuesday 07 June 2016 15:55

Royal Dutch Shell has further cut spending plans and has promised to increase savings following its record purchase of BG and attempts to adjust to the oil price slump.

Europe’s biggest energy company will spend $29bn this year, it said on Tuesday.

That compares with a May forecast for capital expenditure “trending toward” $30bn, which was down from an earlier projection of $33bn. Combined operations with BG will provide $4.5bn in savings in 2018, up from an earlier estimate of $3.5bn.

Chief executive, Ben Van Beurden, who staked his reputation to buy BG as oil prices sank, is promising investors higher returns and cash flows as he resets the company following the $54bn acquisition. He has renegotiated contracts, eliminated thousands of jobs, maintained Shell’s asset-sale programme and sought to improve efficiency to weather the 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,” Mr Van Beurden said in a statement.

Stock Performance

Shell’s B shares, the most widely traded, have increased 11 per cent this year in London, after a 31 per cent gain last year. BP has risen 4.1 per cent and Total 0.4 per cent.

Brent crude, the international benchmark, has rallied about 80 per cent 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 per cent from 14 per cent at the end of last year.

Debt concerns resulted in a credit-rating cut by Fitch Ratings in February, potentially increasing Shell’s borrowing costs.

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 per cent by 2020 at an oil price of $60 a barrel. That compares with an average $12bn free cash flow and 8 per cent return on capital at $90 oil from 2013 to 2015.

How successful Shell is in its $30bn asset-sale programme 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, the 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 cut, taking the tally of losses to 12,500 from 2015 to 2016.

© 2016 Bloomberg

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