Royal Dutch Shell will limit its capital spending through 2020 – focusing on its cash engine businesses such as conventional oil and gas -- to grow its free cash-flow per share and returns as it copes with low oil prices, Shell Chief Executive Officer Ben van Beurden said during the company’s capital markets day 2016 event on Monday.
Shell plans to spend between $25 and $30 billion each year to 2020 as the company seeks to improve capital efficiency and ensure a more predictable development funnel for new projects. Excluding its acquisition of BG Group, Shell expects to spend $29 billion this year, approximately 35 percent lower than the pro-forma Shell-plus-BG-level in 2014.
“In the prevailing low oil price environment, we will continue to drive capital spending down towards the bottom of this range; or even lower if needed. In a higher oil price future we intend to cap our spending at the top end of the range,” van Beurden commented.
New project start-ups since the end of 2014 should contribute approximately $10 billion of annual cash flow by 2018, under a $60 Brent crude oil price scenario.
Shell also is looking to reduce operating costs, planning asset sales, and to exit between five to 10 countries. Programs to sustainably reduce operating costs are in place across Shell, van Beurden stated. The company expects to reach a run-rate of $40 billion of underlying operating costs at the end of this year, 20 percent lower than the 2014 pro-forma level for Shell-plus-BG with potential for further cost reduction. Shell also expects plan asset sales to generate $30 billion for 2016-2018, with up to 10 percent of Shell’s oil and gas production earmarked for disposal.
The company’s cash engine businesses – which include integrated natural gas operations, oil sands mining, and oil products – are stable businesses that underpin the company’s financial delivery today, he said. These businesses should be able to fund dividends and the balance sheet well into the next decade and beyond.
“We continue to invest in selective growth opportunities in these businesses, at a level that enables positive free cash flow throughout the macro cycle,” van Beurden said. “Through-cycle returns here should be attractive and competitive.”
Integrated gas, which was previously a growth priority for Shell, has reached critical mass following Shell’s acquisition of BG Group and planned growth in liquefied natural gas, especially in Australia. The pace of new investment will slow here, and integrated gas will now prioritize the generation of free cash flow and returns.
Shell will give priority to growth projects in its deepwater and chemicals businesses, which should create a pathway to improved returns and material free cash flow from around 2020, as these businesses become new cash engines. Shell, which is developing projects in Brazil and the Gulf of Mexico, expects its deepwater production could double to around 900,000 barrels of oil equivalent per day (boepd) in 2020, versus 450,000 boepd in 2015. The company also has brownfield growth projects underway on the U.S. Gulf Coast and China.
Van Beurden said the company’s shale business – which is focused on North America and Argentina – is expected to become a significant growth priority for Shell beyond 2020 as the company seeks clear pathways to profitability.
Shell’s decision to exit as many as 10 countries as it shifts away from a de-centralized to a centralized strategy following the BG Group acquisition is not surprising, given the cost-savings factors that have led Shell to revisit the strategy.
Christian Stadler, a professor of strategy at Warwick Business School who has extensively researched Shell, said that Shell has typically been very decentralized in the past, compared to a company like ExxonMobil, giving each country a lot of autonomy. While this strategy allowed Shell to establish strong local relationship in a large number of countries, this strategy also is quite costly compared to companies with a centralized strategy.
While focusing on areas where it’s more established and more confident makes sense from a cost-cutting perspective, some activities, such as the Gulf of Mexico, are high-risk, high-reward for Shell. So it needs to focus on where its expertise lies, such as offshore and now LNG following the BG merge, Stadler said.
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