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How Shell’s Levers Could Help It Achieve Its Priorities

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Shell’s cash flow priorities

Royal Dutch Shell (RDS.A) intends to become more resilient to lower oil prices. We looked at how the company is reshaping its robust upstream and downstream portfolios in the earlier two parts of this series. Now, in this part, we’ll look at Shell’s cash flow priorities and levers to achieve its goal.

Shell has set clear priorities for cash utilization. Its first priority is to reduce its debt level. Shell’s debt has risen significantly since the BG Group acquisition. The next two priorities include dividend payments and share repurchases and capital investment. Shell has steadily paid dividends, which we’ll discuss later in the series. To augment shareholder returns, Shell might also consider share purchases if the situation permits.

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Shell’s levers

To achieve cash flow priorities, Shell has four powerful levers, which include divestments, capital expenditure, operating costs, and new projects. Shell plans to exit non-strategic assets or positions, lower capital spending, reduce its operating costs, and increase its cash flows through new projects.

Beginning with divestments, Shell aimed to sell assets to the tune of $30 billion in 2016 through 2018. Of the stated target, $25 is either completed, in progress, or announced. We saw the details of segmental divestments in the previous two parts of this series.

Moving on to capital spending, the company plans to reduce its capital spending to the range of $25 billion to $30 billion per year until 2020. In 2017, Shell expects its capex to be at the lower end of the range at $25 billion. Shell has worked extensively on its projects to reduce capex. For example, Shell has reduced capex by 20% on its Appomattox deep-water project by renegotiating contracts, reducing the numbers of wells, as well as other moves. Similarly, the company’s capex for the Geismar chemical plant in the US and Gannet C fields in the North Sea has fallen 17% and 20%, respectively. On the operating cost front, Shell has reduced its operating cost by 20% (or $11 billion) over 2014.

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To improve its cash flows, Shell plans to deliver new projects on time and within budget. As we discussed in the earlier two parts, Shell has a series of projects in the upstream and downstream segments that are expected to drive growth for the company. As we discussed earlier, Shell’s upstream projects are capable of delivering $10 billion in cash flows by 2018, assuming an oil price of $60.

In short

Shell plans to focus on generating returns even at the lower price point in oil price cycles. The company has clear priorities for cash utilization, which it plans to achieve by pulling four powerful levers.

The strategy has already started paying off, which is evident in its debt and cash flows position after the latest earnings. We’ll review Shell’s debt and cash flow position in the next few parts. But before that, let’s analyze Shell’s segmental earnings in the next part.

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