Shell upgrades BG synergies expectations. Focus on doubling deepwater output

Oil giant Shell on Monday updated „synergies target“ coming from the acquisition of the BG Group. Also, the company said its focus in the upcoming period would be on capital efficiency, and its production in deep water areas.

At the capital markets day, Shell CEO Ben van Beurden said the mega-merger related synergies would be increased from the previously expected $3.5 billion, to $4.5 billion on a pre-tax basis in 2018, an increase of some 30%.

“We expect to achieve and exceed the $3.5 billion synergies prospectus commitment earlier than expected, in 2017, when synergies should be $4 billion. Our other deal-related financial commitments to shareholders in the form of asset sales, debt reduction, and dividends, followed by share buy-backs, are unchanged,” Van Beurden said.

The CEO said Shell would slow the pace of new investments into integrated gas, which has reached critical mass following the BG acquisition and planned growth in liquefied natural gas (LNG), particularly in Australia.

“The pace of new investment will slow here, and integrated gas will now prioritize the generation of free cash flow and returns,” Shell said.

As for the growth opportunities, Shell is looking at deep water. The company said Brazil and the Gulf of Mexico represent the best real estate in global deep water.

“We are developing competitive projects here based on this advantaged acreage. Shell’s deep-water production could double, to some 900 thousand barrels of oil equivalent per day (kboed) in 2020, compared with 450 kboed in 2015,” Van Beurden said.

Beyond 2020

Looking further into the future, beyond 2020, Shell highlighted shale and new energies, for now investment in these areas remains relatively low, focused on current positions and identifying potential opportunities.

In shales, Shell’s restructured portfolio is focused on North America and Argentina, with substantial long-term growth potential, the company said.

In new energies, Shell said there is potential for the company to achieve material scale and profitability.

“As the energy transition unfolds, we intend to establish a portfolio to build on our established strengths in low-carbon biofuels, hydrogen and smart customer solutions; as well as in solar and wind. Many of these activities complement the company’s natural gas strategy today,” Ben van Beurden said.

Capital efficiency

Financials-wise, Shell said its priorities for cash flow, as announced with the BG acquisition, are unchanged. The aim is to reduce debt, pay dividends, and strike a balance between capital investment and share buy-backs.

The company said its free cash flow is being reduced due to low oil prices, and “this could continue for some time”.Brazil gom

In response, Shell said its Capital investment will be in the range of $25-$30 billion each year to 2020, as “we improve capital efficiency and ensure a more predictable development funnel for new projects”.

Investment for 2016 is expected to be $29 billion, excluding the purchase price of BG, some 35% lower than the pro-forma Shell-plus-BG level in 2014.

“In the prevailing low oil price environment we will continue to drive capital spending down towards the bottom end of this range; or even lower if needed. In a higher oil price future we intend to cap our spending at the top end of the range,” Shell said.

Asset sales

The company plans to achieve $30 billion in asset sales for 2016-2018.

“We have earmarked up to 10% of Shell’s oil and gas production, including 5 to 10 country exits, for disposal. We expect to make significant progress on the first $6-8 billion of this program in 2016,” Van Beurden said.

As a result of Shell’s portfolio development and investment, Shell says it expects to see an improvement in returns in the next few years, debt reduced, and “significant growth in free cash flow”, across a range of oil prices.

For example, Shell said organic free cash flow could reach $20-$25 billion and return on capital employed some 10% around the end of the decade, assuming $60 oil prices. This compares to 2013-15 averages of $12 billion and 8% with average $90 oil prices.

Van Beurden concluded: “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.”