Shell axes 6,500 jobs, slashes capex
Oil and gas giant Shell has warned of capital expenditure and workforce cuts due to low oil price environment.
According to the company, operating costs are expected to fall by over $4 billion, or around 10%, in 2015, as its sustainable cost reduction programmes gather pace.
“We plan to reduce costs further in 2016,” said the company.
Shell said it is anticipating some 6,500 staff and direct contractor reductions in 2015. Furthermore, 2015 capital investment is expected to be around $30 billion, a reduction of $3 billion since Shell’s last update in April, and $7 billion from 2014 levels, reflecting cost reductions, project cancellations and re-phasing of growth options. Overall this is a reduction of 20% from 2014 levels, and 35% compared to 2013.
Shell says it continues to review both the ongoing projects under construction, and the medium term investment options, to balance returns, affordability and medium term growth potential.
Asset sales should total $20 billion for 2014 and 2015 combined, despite weak market conditions, the company said.
Shell’s CEO Ben van Beurden said:
“Shell’s integrated business and our performance drive are helping to mitigate the impact of low oil prices on our bottom line.
“As our results today show, we’re successfully reducing our capital spending and operating costs, and delivering a competitive performance in today’s oil market downturn.
“We have to be resilient in a world where oil prices remain low for some time, whilst keeping an eye on recovery. We’re taking a prudent approach, pulling on powerful financial levers to manage through this downturn, always making sure we have the capacity to pay attractive dividends for shareholders.
“These are challenging times for the industry, and we are responding with urgency and determination…”
“At the same time, we are making good progress with the recommended combination with BG, which should enhance our free cash flow, create an IOC leader in LNG and deep water innovation, and be a springboard to change Shell into a simpler and more profitable company. The regulatory filings process and integration planning are both progressing well.
“We will re-shape the company once this transaction is complete. This will include reduced exploration spend, a fresh look at capital allocation in longer term plays, and asset sales spanning upstream and downstream. This should concentrate our portfolio into fewer, higher value positions, where we can apply our know-how with better economy of scale. In essence, we ‘grow to simplify’.
“The result should be a simpler, more profitable, resilient and competitive Shell, able to deliver better returns to shareholders.
“These are challenging times for the industry, and we are responding with urgency and determination, but also with a great sense of excitement for the future.”
According to Shell, today’s oil price downturn could last for several years, and Shell’s planning assumptions reflect today’s market realities.
“The company has to be resilient in today’s oil price environment, even though we see the potential for a return to a $70-$90 oil price band in the medium term,” Shell said.
Progress in Shell-BG combination
In April 2015, Shell announced its recommended combination with BG. The company says it remains on track for completion in early 2016, as planned.
“We are making good progress with the regulatory approvals process, including approvals received from Brazil CADE, South Korea FTC and US FTC. Pre-conditional filings have been submitted, covering Australia, China and the EU, and we are progressing well in other jurisdictions.”
According to the company, a joint team has been established with BG to plan for a world class integration of the two companies once the transaction has closed, and to retain the top talent from both companies.
By combining Shell’s current complementary positions with BG’s LNG and deep water assets, Shell says it can add significant value – beyond the announced synergies – by applying its technology and know-how at greater scale, at a lower cost, concentrating on areas of existing competitive advantage, and through better optimization of the combined portfolio.
Pro-forma combined capital investment for Shell and BG in 2016 is expected to be around $35 billion in the current environment.
Shell expects $30 billion of asset sales between 2016 and 2018, as the combined portfolios are restructured.
The free cash flow expansion expected from BG’s Australia and Brazil growth is a natural fit with Shell’s 2017+ free cash flow growth potential. This in turn enhances Shell’s continued intention to pay a dividend of $1.88/share for 2015 and at least $1.88/share for 2016, and reflects confidence in future financial capacity.
Shell’s second quarter 2015 earnings, on a current cost of supplies (CCS) basis, were $3.4 billion compared with $5.1 billion for the same quarter a year ago.
Second quarter 2015 CCS earnings excluding identified items were $3.8 billion compared with $6.1 billion for the second quarter 2014, a decrease of 37%.
According to Shell, compared with the second quarter 2014, CCS earnings excluding identified items benefited from strong Downstream results reflecting steps taken by the company to improve financial performance and higher realised refining margins.
In Upstream, Shell says earnings were impacted by the significant decline in oil and gas prices and decreased production volumes, partly offset by lower costs and depreciation.
Cash flow from operating activities for the second quarter 2015 was $6.1 billion, compared with $8.6 billion for the same quarter last year. Excluding working capital movements, cash flow from operating activities for the second quarter 2015 was $7.6 billion, compared with $11.0 billion for the second quarter 2014.
Oil and gas production for the second quarter 2015 was 2,731 thousand boe/d, 11% lower than for the second quarter 2014. Excluding the impact of divestments, curtailment and underground storage reinjection at NAM in the Netherlands, PSC price effects, and security impacts in Nigeria, second quarter 2015 production was 3% lower than for the same period last year.