LONDON — Royal Dutch Shell is planning to cut more costs — at a faster rate — than previously planned as a result of its merger with BG Group Plc this year.
The Anglo Dutch energy company tried to assure investors Tuesday it could handle the debt that came with its US$54 billion takeover. Critics have questioned the deal following a drop in oil prices.
Shell argues the deal provided opportunities to cut costs by eliminating duplication. Shell CEO Ben van Beurden says synergies would result in $4.5 billion in savings by 2018, up from $3.5 billion estimated earlier. Shell will spend some $29 billion this year, compared with earlier projections of $33 billion.
Shell said it is also moving to exit as many as 10 countries, but did not identify them.
Shell will spend US$29 billion this year, it said Tuesday. That compares with a May forecast for capital expenditure “trending toward” US$30 billion, which was itself down from an earlier projection of US$33 billion. Synergies from the BG acquisition will provide US$4.5 billion in savings in 2018, up from an earlier estimate of US$3.5 billion.
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 US$54 billion 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.
“If we see oil price levels at a level where we have to go further, we will go further,” Van Beurden said in an interview with Bloomberg TV. “We still have more in our tank in terms of taking cost out. We have more in our tank in terms of deferring or canceling investment programs.”
Shell’s B shares, the most widely traded, rose as much as 2.8 per cent and traded 2.2 per cent higher as of 9 a.m. in London. The stock has increased 13 per cent this year. outperforming European competitors BP and Total.
Shell’s capital investment will be in the range of US$25 billion to US$30 billion a year to 2020. The company can reduce that further if required by low oil prices, even though it needs to spend about US$25 billion a year to ensure future growth, Van Beurden said.
The cost-cutting measures announced by Shell come as executives say that the oil industry could reduce spending in 2017 for a record third-consecutive year. The industry has already cut investment for two straight years in 2015 and 2016, the first time since 1986-87.
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, meaning companies are having to borrow to maintain dividend payouts even after cutting billions of dollars of spending.
While Shell is banking on BG’s assets to boost production and cash flow, 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.
Reducing debt is Shell’s “first priority” for cash, Van Beurden said in the interview.
Shell pledged to raise free cash flow to US$20 billion to US$25 billion and boost the return on capital employed to 10 per cent by 2020 at an oil price of US$60 a barrel. That compares with an average US$12 billion free cash flow and 8 per cent return on capital at US$90 oil from 2013 to 2015.
How successful Shell is in its US$30 billion 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 U.K. North Sea and Gabon.
Low oil prices make it more difficult for Shell to sell its assets. The company expects to “make significant progress” on as much as US$8 billion of its sale program this year. It has earmarked up to 10 per cent of production for divestment, including exiting five to 10 countries.
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.
With files from Bloomberg and Associated Press