Shell cuts capex, upstream output falling

OREANDA-NEWS. August 03, 2015. Shell has today cut its planned capital investment budget as its second-quarter profit fell by over a third, and its production fell by 11pc compared with a year earlier.

In its upstream division, earnings were hit by sharply lower oil and gas prices and reduced production volumes, while lower costs and decreased depreciation softened the blow. Upstream profit dropped by 80pc to \\$774mn compared with the same period of last year.

The company's quarterly production fell by 11pc year on year to 2.731mn b/d of oil equivalent (boe/d) because of "planned maintenance at Pearl GTL in Qatar, heavy oil in Canada, and deepwater in the Gulf of Mexico, lower fiscal entitlement at Majnoon in Iraq, curtailment and underground storage reinjection at NAM in the Netherlands, and divestments in North America resources plays".

In this quarter, Shell expects upstream earnings to be impacted by "some 104,000 boe/d as a result of divestments, some 80,000 boe/d associated with the impact of curtailment and underground storage reinjection at NAM, and some 33,000 boe/d driven by planned maintenance" compared with the same period of last year.

Shell has reduced its planned 2015 organic capital investment budget by \\$3bn to around \\$30bn compared with its April estimate and expects about 6,500 staff and direct contractor job cuts this year. The company said it is planning for a prolonged downturn.

"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," said Shell chief executive Ben van Beurden.

The \\$3bn capital investment cut for 2015 reflects "cost reductions, project cancellations and re-phasing of growth options," Shell said.

"Today's oil price downturn could last for several years, and Shell's planning assumptions reflect today's market realities," it said. "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/bl oil price band in the medium term."

Shell expects operating costs to fall by more than \\$4bn, or 10pc, this year thanks to "sustainable cost reduction programmes", and the firm aims to cut costs further next year.

The company's second-quarter profit fell to \\$3.4bn from \\$5.1bn a year earlier because of lower oil prices. Shell's operating cash flow declined to \\$6.1bn in April-June from \\$8.6bn a year earlier and \\$7.1bn in January-March. Its second-quarter capital investment amounted to \\$7.1bn and asset sale proceeds reached around \\$400mn.

But Shell's downstream division made a profit of \\$2.7bn compared with \\$1.3bn a year earlier thanks to higher refining margins.

Shell plans to make a total of \\$20bn from asset sales in 2014 and 2015 despite weak market conditions.

The company confirmed it remains on track to complete its acquisition of the UK's BG in early 2016. It sees synergies from the deal of at least \\$2.5bn/yr from 2018. Shell also expects significant value to be added beyond the 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 optimisation of the combined portfolio".

"Pro-forma combined capital investment for Shell and BG in 2016 is expected to be around \\$35bn in the current environment," Shell said.

It plans \\$30bn of asset sales in 2016-18 as a result of the combined portfolio restructuring.

"We will re-shape the company once this transaction is complete," said van Beurden. "This will include reduced exploration spend, a fresh look at capital allocation in longer term plays, and asset sales panning upstream and downstream."

Shell confirmed plans to pay dividends of \\$1.88/share this year and at least as much in 2016.