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How Important Are Divestments to Shell’s Cash Flow?

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Analyzing Shell’s cash flow

In 2015, Royal Dutch Shell (RDS.A) generated around $30 billion in cash from operations. The company had cash outflows of $26 billion in the form of capital expenditure (capex) and $9 billion in the form of dividends, amounting to total cash outflows of $35 billion.

To fund the gap of $5 billion plus the BG Group acquisition price (cash consideration) of $19 billion, Shell resorted to asset sales and the issuance of fresh debt.

Shell’s current dividend yield stands at 7.5%. Shell’s peers ExxonMobil’s (XOM) and Chevron’s (CVX) dividend yields stand at 3.5% and 4.4%, respectively. Comparatively, BP’s (BP) dividend yield stands at 7.6%.

For exposure to high-dividend stocks, you can consider the Vanguard High Dividend Yield ETF (VYM). The ETF has ~10% exposure to energy sector stocks and contains XOM and CVX in its portfolio.

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Role of divestments in Shell’s cash flow

In anticipation of the BG acquisition’s closing in February 2016, Shell maintained a high cash reserve of $32 billion as of December 31, 2015. Its cash levels would have fallen upon completion of the acquisition. In 2016, Shell will likely require $33 billion for capex plus $9 billion for dividends if dividend outflows are assumed to be at last year’s level.

How will the company fund its capex and dividend program in 2016, especially with reduced cash reserves? This gap is likely why Shell has put $30 billion worth of its assets up for sale. The company expects around $10 billion worth of divestment proceeds in 2016.

However, there are many expenditures on deck, including debt reduction to maintain a comfortable leverage position, capex to fund growth, and dividends to keep shareholders happy.

If oil prices continue to rise, Shell’s cash flows from operations will likely improve. Higher cash flows coupled with divestment proceeds will likely be sufficient to sustain capex, dividends, and a comfortable leverage position.

On the contrary, if cash flows fall due to lower crude oil prices, Shell will have to make a call on which objective to fulfill: leverage, growth, or dividends?

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