uploads///Cash Engines

Which Businesses Are Shell’s Cash Engines?

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Jun. 14 2016, Published 2:19 p.m. ET

Shell’s divisions

Royal Dutch Shell (RDS.A) has set out clear pathways to retain and grow its cash flows. Shell’s cash engines are its main, focused businesses that have already gone through restructuring and divestments. They’re expected to generate stable surplus cash to cover dividends and buybacks.

They’re also expected fund the company’s future growth. Growth priorities are advancing to become tomorrow’s cash engines, and future opportunities will earn cash for the next decade and beyond.

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Shell’s cash engines

In terms of Shell’s cash engines, its refining and marketing oil products have been fully restructured and have delivered good returns over time despite a fall in refining capacity and marketing volumes.

Shell’s refining and marketing oil products are expected to maintain their performances through the oil cycles to return more than $5 billion worth of free cash flow per year by 2019–2020. Oil sands exploration and production has advanced from a growth priority to a cash engine.

Integrated gas, which includes liquefied natural gas, is a capital-intensive business in which Shell has employed more than one-third of its capital. The integrated gas business was strengthened by Shell’s acquisition of BG Group. Shell expects to earn double-digit returns and more than $5 billion in free cash flow per year from its integrated gas portfolio by 2019–2020.

The BG deal has also enlarged Shell’s conventional oil and gas portfolio. Shell plans to increase its cash flows from existing projects in this portfolio. It also plans to spend on exploration in areas where the company has existing infrastructure and sub-surface knowledge in order to rapidly capitalize.

Shell’s growth priorities

In terms of growth priorities, Shell is clearly focusing on its deep-water and petrochemical businesses. These have projects that demonstrate a clear competitive edge.

In terms of its deep-water business, Shell focuses on fundamentally advantaged geologies such as Brazil and the Gulf of Mexico. In its petrochemicals business, Shell focuses on projects with competitive edges such as low-cost feedstock. Decisions on these portfolios are based upon project returns, capital expenditure, and turnaround periods.

Shell’s future opportunities include shales and new energies, which demand high capital expenditure but could earn substantial cash flows in the future.

For exposure to integrated energy sector stocks, you can consider the iShares Global Energy ETF (IXC). The ETF has ~56% exposure to the sector and contains Chevron (CVX), BP (BP), and Total S.A. (TOT).

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