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Shell: Stronger in Q1 Due to Its Strategy

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May. 16 2019, Published 10:26 a.m. ET

Shell’s strategy

In the first quarter, Royal Dutch Shell (RDS.A) strengthened its financials by focusing on the capex, divestments, operating costs, and new projects. Shell optimized capital spending, exited non-strategic assets or positions, lowered its operating costs, and increased its cash flows by delivering new projects.

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Shell’s capex was ~$6.7 billion in the first quarter, which showed the impact of accounting changes for IFRS 16. Shell focused on optimizing its capex to strike a balance between growth and savings. The company expects to spend $25 billion–$30 billion per annum on a pre-IFRS basis in the next few years.

Shell plans to divest more than $5 billion of assets per annum in 2019 and 2020. So far in 2019, the company has already announced ~$2 billion of assets for divestments. The company plans to use divestment proceeds to repay debt. Shell successfully achieved its divestment target of $30 billion in 2016–2018, which improved its liquidity position.

Shell has delivered new projects according to the schedule to boost its cash flows. In the first quarter, the company’s FPSO P-67 started production in Lula North. By 2020, Shell plans to realize $5 billion of additional cash inflows from the new projects.

Shell reduced its underlying operating cost by ~$0.5 billion in the first quarter. The company has reduced project break-evens, which made it profitable even at lower oil prices.

Shell aims to focus on the four parameters mentioned above. The strategy has yielded results. Shell could repay some of its debt, pay dividends, and buy back shares in the quarter, which would likely strengthen its financials.

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