Royal Dutch Shell RDSa.L will exit oil and gas operations in up to 10 countries in a drive to deepen cost cuts and narrow its focus following its $54 billion acquisition of BG Group.
Presenting its strategy following the close of that deal in February, the Anglo-Dutch company outlined plans to target annual spending of $25 billion to $30 billion until the end of the decade.
It lowered its planned 2016 capex to $29 billion in a third cut from an initial $35 billion.
Shell also raised its target for savings from the integration of BG to $4.5 billion, up $1 billion from previous guidance.
Chief Executive Officer Ben van Beurden hopes the new cuts will help boost Shell’s shares, which have underperformed rivals since the BG deal was announced in April 2015.
He said the company would focus its short-term growth on deepwater projects in Brazil and the Gulf of Mexico.
Deepwater production could double to some 900,000 barrels of oil equivalent per day in 2020, the company said.
“Our strategy should lead to a simpler company, with fundamentally advantaged positions, and fundamentally lower capital intensity. Today, we are setting out a transformation of Shell,” van Beurden said.
Shell’s shares were up 1.5 percent shortly after market open.
Shell said savings and asset sales could increase returns on capital employed to shareholders to around 10 percent by the end of the decade, assuming an oil price of $60 per barrel, up from around 8 percent between 2013 and 2015.
A main source for cost savings, including 12,500 job cuts this year, will come from significant overlaps in operations in areas including Australia, Brazil and the North Sea.
“Overall, we read the statement as positive, and expect Shell to reverse some of its underperformance versus peers in recent days,” said Biraj Borkhataria, analyst at RBC Capital Markets, who holds an “outperform” rating on Shell’s stock.
COUNTRY EXITS
Shell will also expand its chemicals business, particularly in the United States and China.
It also gave the go-ahead for investing in a new cracker and polyethylene plant in the United States, one of a handful of investment decisions it will make this year as it grapples with the sharp drop in oil prices over the past two years.
Shell will slow its new investment in its integrated gas business, which includes its liquefied natural gas (LNG) operations, which has “reached critical mass following the BG acquisition”.
The merger makes Shell the world’s second biggest international oil company behind Exxon Mobil XOM.N and the top LNG trader.
In the long term, the company said it would target shale oil and gas production in North America and Argentina as well as renewable energies hydrogen, solar and wind.
Shell plans to sell $30 billion worth of assets around the world by around 2018 and quit operations in 5 to 10 countries to reduce its balance sheet gearing which soared to 26 percent following the BG deal. It also has announced it plans to implement a share buyback program.
It did not say which countries it might exit. Media has reported that Shell plans to sell its assets in Gabon.
Shell targets $6-$8 billion in sales in 2016. Chief Financial Officer Simon Henry said the company expects to make at least $3 billion mainly from downstream disposals this year as refining, infrastructure and retail are more immune to oil price fluctuations.
However, sales of oil and gas production assets have dropped through the downturn amid high oil price volatility.
