LONDON (Alliance News) - Royal Dutch Shell PLC on Tuesday said its plans concerning asset sales and debt reduction remain unchanged and it still plans to maintain its dividend this year followed by a share buyback in 2017, as the oil major set out its plan following the acquisition of BG Group.
Shell also plans to exit up to 10 countries where it currently operates as part of its asset sale programme that will run until 2018, whilst capital investment this year has been reduced by a further USD1.00 billion.
Some observers had been expecting Shell to possibly extend the timeline by which it planned to offload a substantial amount of assets, but Shell said Tuesday all of its plans remain unchanged.
The major change Tuesday was the increase in the amount of synergies that Shell expects to deliver from its GBP35.00 billion takeover of BG Group earlier this year, as Shell now expects to deliver USD4.50 billion worth of "deal-related synergies" in 2018 compared to the original target of USD3.50 billion.
As a result of the increased BG synergies target, Shell expects to deliver USD4.00 billion worth of synergies by the end of 2017, with the last USD500.0 million expected in 2018 - meaning Shell will hit that original USD3.50 billion goal earlier than expected.
"The BG deal is an opportunity to accelerate the re-shaping of Shell. Integration is gathering pace, and today we expect to deliver more synergies, and at a faster rate," said Shell Chief Executive Ben van Beurden.
"Our other deal-related financial commitments to shareholders in the form of asset sales, debt reduction, and dividends, followed by share buy-backs, are unchanged," said the company.
Shell plans to offload USD30.00 billion worth of assets between 2015 and 2018, but the market thought there was potential to extend that timeline as depressed oil prices are likely to hinder sales.
"Overall, Shell's focus is on re-shaping the company. We will retain the most competitive and resilient positions, through targeted investment, and substantial asset sales. This is a value-driven, not time-driven, divestment programme; and an integral element of Shell's portfolio improvement plan," said van Beurden.
Shell has locked-in around USD3.00 billion of asset sales this year, and that should reach USD6.00 to USD8.00 billion by the end of the year. Shell previously said asset sales were likely to be back-loaded as it hopes oil prices will have rebounded by 2017 and 2018.
Importantly, Shell had not previously outlined which assets were up for sale or from which segment of the business they would come: upstream, midstream or downstream. However, Shell provided a glimpse into its asset sale plan on Tuesday,.
"We have earmarked up to 10% of Shell's oil and gas production, including 5 to 10 country exits, for disposal," said Shell.
Shell has committed to maintaining its annual dividend of USD1.88 per share this year and plans to stick to its commitment to carry out a share-buyback programme of at least USD25.00 billion in 2017.
Although the dividend is safe for 2016, Shell has not committed to any dividend in 2017 and failed to clarify on the future of dividends, only stating it was the company's second priority after reducing debt, which has soared to over USD80.00 billion following the BG deal.
As a result of the BG acquisition, Shell's gearing at the end of March stood at 26% compared to 14% at the end of 2015, prior to the deal being completed in February.
In order of priority, Shell said it will reduce debt, pay dividends and then balance between capital investment and share buybacks.
Shell had already lowered its capital expenditure budget post-BG to USD30.00 billion from USD33.00 billion, and on Tuesday said capital investment would total USD29.00 billion this year and then between USD25.00 billion to USD30.00 billion per year until 2020.
"In the prevailing low oil price environment we will continue to drive capital spending down towards the bottom end 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," said Shell.
Shell said it will create a more predictable funnel of new development projects whilst the cap on capital investment and expenditure is in place.
Notably, the combined capital expenditure budget of Shell and BG in 2014 was more than a third higher than the new combined 2016 budget, amounting to USD47.00 billion.
Shell also updated its financial outlook as it warned that cashflow, unsurprisingly, has declined because of lower oil prices and said this "could continue for some time," prompting the company to take action.
Importantly, Shell has based its outlook on an oil price of USD60 per barrel - 20% higher than the current Brent price of just over USD50 on Tuesday morning.
Alongside capping investment and expenditure, Shell is expecting new projects to add a further USD10.00 billion worth of annual cashflow by 2018, and its programmes should also allow underlying operating costs to amount to around USD40.00 billion per year by the end of 2016 - 20% lower than pro-forma 2014 - the company said.
"As a result of Shell's portfolio development and investment, we expect to see an improvement in returns in the next few years, our debt reduced, and significant growth in free cash flow, across a range of oil prices," said Shell.
"For example, organic free cash flow could reach USD20.00 to USD25.00 billion and return on capital employed some 10% around the end of the decade, assuming USD60 oil prices. This compares to 2013-15 averages of USD12.00 billion and 8% with average USD90 oil prices," the company added.
"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," said van Beurden.
Away from the financial future of Shell following the BG-deal, the company also outlined its operational plans moving forward.
Shell said its "cash engines," referring to the company's stable businesses, will underpin the company's performance and focus around conventional oil and gas, integrated gas, oil sands mining and oil products.
One of the major attractions of BG was its integrated gas and subsea operations and its exposure to geographical regions such as Brazil and Australia. Although three of those so-called cash engines are upstream, oil products is part of downstream operations, which refine and make products out of oil, such as fuel and plastics.
"Integrated gas, which was previously a growth priority for Shell, has reached critical mass following the BG acquisition and planned growth in liquefied natural gas, particularly in Australia. The pace of new investment will slow here, and integrated gas will now prioritise the generation of free cash flow and returns," said Shell.
Shell plans to target "selective growth" in those four areas because returns from them should remain attractive and competitive even throughout the ongoing downturn in the market.
The main growth targets over the next few years will be deep-water operations and chemicals, which Shell believes will lead to improved returns and material free cashflow from 2020 onwards as it is hoping those two areas will also become cash engines.
"We give priority to growth projects in these businesses, such that free cash flow may be negative at the lower end of the cycle. Returns should improve over the next three to five years," said Shell.
Brazil and the Gulf of Mexico are two of the best worldwide regions for deep-water operations, and Shell plans to utilise its acreage in those regions to significantly boost production. The company said it could potentially double production from the two regions to 900,000 barrels of oil equivalent per day by 2020 by developing projects in the area.
Production from Brazil and the Gulf amounted to an average of around 450,000 barrels a day in 2015.
Looking at the downstream division, Shell hopes to grow the chemicals business and already has brownfield growth projects on the US Gulf coast and in China.
Shell on Tuesday revealed it has made a final investment decision on a new 1.5 million per year cracker and polythene plant in the US state of Pennsylvania, which will use natural gas that is derived from shale as its feedstock.
"Once these projects are on stream, early in the next decade, Shell's ethylene capacity should reach around 8.0 million tonnes per annum, compared with 6.2 million tonnes per annum today," said Shell.
In the longer term, Shell said it will focus on growing its shale business, particularly onshore the US and also in Argentina, and also in new energies, which refers to low-carbon biofuels, solar, wind and hydrogen operations, meaning Shell aims to grow its exposure to renewable energy in the longer term.
Shell 'A' shares were up 2.7% to 1,746.00 pence per share on Tuesday, whilst 'B' shares were up 2.6% to 1,757.00p.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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