A file picture of a Shell petrol station in central London.
LONDON: Anglo-Dutch oil company Royal Dutch Shell plans to sell assets, cut spending and freeze a controversial Arctic drilling programme to improve returns after a major profit warning.
Just a month into his new job as chief executive of the world’s No.3 investor-owned oil company, Ben van Beurden set out plans to make the group much leaner.
The planned changes follow a profit warning for the quarter to the end of December, detailing across-the-board problems that partly reflect how the industry is grappling with flat oil prices, the need to control costs and replace oil reserves that are being used up in production.
“Our overall strategy remains robust, but 2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance,” van Beurden said in a statement.
Other big oil companies are also struggling for profit growth. Shell’s warning, two weeks after van Beurden replaced former boss Peter Voser, followed one earlier in January by Chevron Corp, the second-largest US oil company.
Shell’s capital spending will fall to $37bn this year from $46bn in 2013, it said, while it will also increase its rate of asset disposals, with a target to sell $15bn worth of assets in 2014-15. The company said it would also take tough decisions on projects, cancelling this year’s planned controversial and costly hunt for oil in Alaska’s Arctic seas, in a U-turn of plans made as recently as December.
To sweeten investors, it plans to raise its first quarter dividend by 4 percent compared with the same period last year to $0.47 per share, in a move which it said reflected confidence in its ability to boost free cash flow. Shares in Shell gained 2.2 percent to 2,173 pence, making it one of the top risers on Britain’s bluechip index.
“This is a good start, they’re saying the right things, more loudly and more quantified than we had expected,” Royal Bank of Canada analyst Peter Hutton said, adding that the increase in the dividend was “confident” and ahead of his expectations.
Shell had spent around $4.5bn searching for oil off the coast of Alaska since 2005 but was forced to cancel last year’s Arctic offshore drill season after the grounding of a drillship in a storm in 2012 and against a backdrop of significant environmental opposition.
“We are making hard choices in our world-wide portfolio to improve Shell’s capital efficiency”, van Beurden said.
The $15bn of disposals targeted for this year and next would be equivalent to around 6.5 percent of Shell’s current $228bn market capitalisation and compared to proceeds from divestments of $1.7bn in 2013.
RBC’s Hutton said that on a return on average capital employed basis, Shell was in line with its peers at about 11 to 12 percent. But the company had more opportunity than others to improve that metric, he added, given that a high proportion of its capital was employed in projects yet to come onstream or in US shale gas.
Weak gas prices in the US prompted Shell to say that it was considering asset sales in its US shale business and it warned that impairment charges were possible. The company is currently valued below its peers, with a forward looking price to earnings ratio of 9.8 times, compared with its European peers which are on 11.6 times.
Van Beurden also said Shell would abandon its previously-set cash flow and spending targets. The company had set a cash flow target of achieving between $175bn to $200bn between 2012 and 2015, at an oil price of between $80 to $100.