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Royal Dutch Shell – Time to Pull the Plug

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Shell is expected to make some of the biggest announcements, as it tries to create a leaner structure following the $70 billion acquisition of BG Group.

In fact, The Hague-based group will look to liquidate $30 billion worth of assets once the megadeal is finalized. Shell is already believed to have sold properties worth around $20 billion during the 2014-2015 timeframe. It’s part of the company’s efforts to strengthen its financial position and earn considerable cash flow for the shareholders in the years to come. Toward this goal, Shell has also announced plans to cut 6,500 jobs (or 7% of its global workforce). 

If that was not enough, it has been left bleeding by skyrocketing capital expenses. While Shell has engineered a spending cut of $8 billion in 2015 to prune its capital expenditure to around $29 billion, it remains quite high by industry standards. Worryingly, the group continues to struggle to grow production despite spending billions in capital expenditures. For the nine months ended Sep 30, 2015, the Anglo-Dutch powerhouse said its total volume of crude oil and natural gas averaged 2,925 thousand oil-equivalent barrels per day (MBOE/d), down 4% from the comparable period of 2014.

Therefore, the energy company’s huge exploration and drilling expenditure has failed to augment output. With fewer oil and gas to sell, the firm is not being able to generate enough cash from operations to take care of its rising spending and shareholder payouts. This has forced the likes of Shell to take more debt in the face of slipping cash balance.

Add to this the slump in oil prices, and it does raise some questions regarding the group’s ability to finance shareholder returns. Notwithstanding the fact that Shell has maintained its dividend at $3.76 per ADS, there is no doubt that its balance sheet is under pressure from spiraling capital spending and shareholder distributions.

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