Shell Sets Sights on Top Spot
The CEO of Shell wants the company to regain its position as the best home for investors’ cash, a position it lost for the first time after 90 years in the late 1990s, when the wave of mergers created giants such as ExxonMobil, the present title-holder. It will do this by picking only the highest margin production to invest in; high-grading its portfolio; and developing new growth engines, said Ben van Beurden.
The main levers affecting value growth are asset sales; cuts in capital expenditure and operating expenditure; delivery of projects; and the oil price.
Apart from the last, all of these are under Shell’s control. The last is tricky but a common problem for all producers. Each $10/b more or less adds or subtracts $5bn/yr from cash-flow, said CFO Simon Henry. He sees the price reaching the mid-$60s in 2018. In the meantime the company will rely less on exploration, with 1mn barrels of oil equivalent/day more than it had before the BG merger. “This is a great set of assets with a high margin,” he said.
Of the company’s capital employed, two thirds of it is in cash engines, a quarter in growth engines and the remainder in longer-term projects such as shale and new energies. Cash engines, such as LNG, have to yield high – double-digit – returns as they have to support everything else the company wants to do.
Investment on capital projects will stay within the $25bn-30bn/year range, starting off this year at $29bn; if the oil price goes lower for some time the floor may also fall, said Henry. Debt gearing is now at 26% and will probably rise again before going down, but it will not go above 30%. Dividends will grow. Capex will not go above $30bn until the substantial part of the buy-backs has been done, he said. At the time the deal was announced, the structure was criticised because of the impact it would have on Shell dividends.
Asset sales will yield $30bn by 2018, a tenth of the current balance sheet, but there is no time-pressure to sell. “They will not be at give-away prices,” he said. “If it takes longer, and we preserve shareholder value, so be it.”
The company has already saved $45bn from project cancellations or sales. These include projects in Malaysia and Australia – Arrow and Wheatstone are off, but not Browse.
Ben van Beurden (image credit: Shell)
LNG glut 'to last till early 2020s'
Van Beurden said that the significant oversupply of LNG would last until the early years of the next decade. Of its own portfolio, 10-15% is sold spot and those cargoes are going into developing new markets where term supply could develop. None were named but Shell has been in talks with governments in Morocco, for example, about using floating LNG import terminals (FSRUs) as bridgeheads to develop markets where it can later move in more substantially.
At the moment, integrated gas is the biggest cash engine, which accounts for about a third of capital employed and will be a major contributor to growth going forward. “We need double-digit return,” he said. Chemicals and deepwater are next growth priorities. “We must focus on areas where our assets are better than our rivals’ and we must be best in class in execution." Future opportunities come from renewables wind, shales. There is no point in shale until the price rebounds, as they have a very short payback period, he said.
Van Beurden also gave more details of a petrochemicals investment in Pennsylvania, for which no financial details have been provided, and commented on the proposed Nord Stream 2 subsea gas pipeline in which Shell is a 10% shareholder.
Speaking about 100 days after the Anglo-Dutch major completed its acquisition of UK gas group BG, Ben van Beurden conceded there were challenges ahead, and the company had to be more resilient, grow its free cash flow and its return on capital employed.
But he said that there were several billions of dollars more synergies than the company expected late last year before the deal went through, which gave it a bit of breathing-space, and that the value of BG was some $10bn above the price paid, based on last February’s forward price curves. Henry said that the $4bn/yr pre-tax synergies target would be attained in 2017, a year ahead of forecast; and reach $4.5bn in 2018, compared with the original estimate of $2bn by 2018. Staff redundancies have been bigger than expected. Buy-backs and debt reduction will be the main beneficiaries once the scrip has been turned off.
On specific projects Henry said the politics surrounding the “major gas reserves” in the eastern Mediterranean, such as Cyprus and Israel as well as Egypt, had to be dealt with before gas could flow into its idle Idku liquefaction plant – part of the BG legacy – in Egypt: “The most logical solution would be to take gas to the empty LNG plant from there, but it is too early to say what the solution might be. Which is the most economic? The market needs to be developed.”
Nigeria’s security situation was already pretty tough and is continuously deteriorating. The Niger Delta Avengers are targeting oil and gas infrastructure, which affects us, the government and the people, Shell said, but this did not affect the deepwater oil or the LNG.
Another country in the headlines where Shell is active is Brazil. Riddled with corruption, its national champion Petrobras in bribery allegations, and with onerous local content rules, the upstream fundamentals are nevertheless “incredibly strong… It is the most attractive deepwater real estate, these projects will be competitive,” Shell said. “Deepwater operators can work there, and that is attractive for them and for the country too. Brazil needs time to work. It has much more upside than downside.”
William Powell