At its annual strategy update, energy major Royal Dutch Shell PLC (RDS.A) unveiled its business policy. In particular, the company outlined plans to increase production 12% by 2014, while continuing to restructure its downstream operations that have been struggling with weak demand.
According to the oil behemoth, these initiatives are expected to improve the organization’s efficiency and sharply boost cash flow from operations.
Shell will now focus on growth in its exploration and production business. The company also pegged its capital expenditure budget at a minimum of $25 billion per year for 2011–2014.
Highlights of the meeting are summarized below:
Continued Progress with Downstream Restructuring:The integrated major stressed that it will go on with its divestment of some refining and marketing properties as part of the streamlining program that started last year. In recent times, Shell’s downstream results have been sharply lower, adversely affected by depressed refining margins. The bearish downstream environment (sluggish demand and surplus capacity) is likely to persist well into 2011.
Nevertheless, the segment remains important for Shell. After saving over $2.5 billion in the last two years, the firm has set a new target to cut a further $1 billion in costs during 2011–2012.
As part of the restructuring initiatives since end-2009, Shell has trimmed refining capacity by over 700,000 barrels per day, reduced its marketing footprint, and generated $4.7 billion of asset sale proceeds.
Upstream Focus: The Anglo-Dutch supermajor also said that it expects its annual production to increase 12% by 2014 (from 2010 levels), driven by a new wave of project startups. Shell’s targeted output rise, to 3.7 million oil-equivalent barrels per day (MMBOE/d), represents one of the most ambitious growth programs in the sector, to be achieved primarily by new projects coming onstream in Qatar, Australia and North America. The Hague-based group is currently assessing more than 30 new projects that should guarantee upstream growth to at least 2020.
Cash Flow Boost: As new projects come online, Shell expects cash flows to increase significantly during the 2009–2012 period, by around 50% with oil at $60 per barrel, and by over 80% at $80 per barrel. The company is on track to deliver on its target – defined in early 2010 – by achieving around $10 billion (or 40%) improvement in operating cash flows in 2010.
Capital Expenditure & Funding: To meet these targets, Shell expects to spend more than $100 billion in capital expenditure over the next four years (some $25–$27 billion annually), quite high by industry standards.
Royal Dutch Shell – Europe’s largest oil company by market value and ahead of BP plc (BP) and Total SA (TOT) – owns one of the largest integrated oil and gas businesses in the world. The group has operations all over the world and is involved in various activities related to oil and natural gas, chemicals, power generation, renewable energy resources and other energy-related businesses.
Royal Dutch Shell ADRs currently retain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
BP PLC (BP): Free Stock Analysis Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
TOTAL FINA SA (TOT): Free Stock Analysis Report
Zacks Investment Research
