Shell asset sales on track, no plans for ‘Baby Shell’ IPO: CEO

Holly Ellyatt | Stephen Sedgwick: 7 June 2016

Royal Dutch Shell‘s plans to sell off assets and pull out of up to 10 countries are on track, the oil major’s chief executive told CNBC on Tuesday, putting to bed rumors of a spin-off of non-core assets into a “Baby Shell.”

On the company’s capital markets day in London, Shell in a statement said that it was taking action to deliver on lower costs, lower spending. asset sales and “profitable new projects.”

In terms of asset sales, the company confirmed these were expected to total $30 billion for the 2016-2018 period.

The company added that it had “earmarked up to 10 percent of Shell’s oil and gas production, including 5 to 10 country exits, for disposal.” Shell expected to “make significant progress on the first $6 billion-$8 billion of this program in 2016.”

Shell Chief Executive Ben van Beurden told CNBC that there was plenty of interest in the assets from buyers, dismissing speculation to the contrary. “No, I think we have a lot of interest from a very wide universe of buyers which we are engaging with…but the buyers are there.”

“It is a crowded market but I’m not worried. The $30 billion of asset sales is pretty much on the cards and I don’t feel we need to have an update on that today.”

He reiterated that the asset sales program was an important part of the company’s overall strategy but the divestment would be done in a “value-driven rather than a timetable-driven way.”

Van Beurden said speculation that the group was going to spin off its more mature, non-core assets in a what has been dubbed a “Baby Shell” IPO was unfounded.

“I think this was something created out of nowhere. I’m not ruling out anything in the longer run of course but it wouldn’t do the trick for us. Having an IPO wouldn’t really release the value of these assets in a way that helps you in your financial framework.”

“The preference (for us) is to just to make sure that we take a number of assets that are more attractive for other types of operators…that we concentrate our portfolio on the higher-quality assets that fit our strategy better. So selling is more important than floating.”

As well as asset sales, the company said that capital investment would be in the range of $25 billion-$30 billion each year to 2020 as the company looks to improve capital efficiency and “ensure a more predictable development funnel for new projects.”

The company said it would respond to a “changing landscape” by “re-shaping” the company with a plan to grow free cash flow and returns despite the volatile oil market environment.

It said that in a $60 oil price environment, the company had the potential for $20-25 billion organic free cash flow and 10 percent return on average capital employed (ROACE) around the end of the decade.

It said its priorities for cash flow were to reduce debt, pay dividends and achieve a “balance between capital investment and share buybacks.”

Van Beurden told CNBC he believed a forecast of $60 a barrel by 2020 was “realistic” although he conceded that it was “difficult to predict” the direction of oil prices currently.

The company was doing everything it needed to do to make sure it could live within its means, he said. Its policy of growing the dividend in line with earnings remained.

“Our focus is going to be on the things that we can improve and that we can influence, so it’s free cash flow per share and it’s returns. So by the end of the decade, we need to be a company that can comfortably produce about $20 billion-$30 billion of organic free cash flow…and that will give us ample cover in terms of what we need to do in terms of dividend and debt.”

Tough times

It’s not been an easy couple of years for the company, which has suffered from the sharp drop in oil prices since mid-2014. That has forced it to cut costs and reduce its workforce.

In May, the company posted a sharp fall in earnings for the first three months of 2016 as the tumble in oil prices continued to take its toll.

The results were the first Shell had posted since its $54 billion acquisition of BG Group in February which will give it greater access to Brazil’s deep water oil fields.

Van Beurden said the company’s acquisition of BG Group was more valuable than previously thought and added there were more opportunities for synergies. “So there’s about a $1 billion of more synergies coming out and they’re coming about a year earlier than what we anticipated before.”

In the company’s investor statement, Van Beurden said that the company’s strategy set “a clear course for stronger returns and free cash flow” despite a backdrop of continued uncertainty in the oil industry.

“I see important opportunities for Shell from the substantial and lasting changes underway in the energy sector,” he said.

“We expect to see robust demand for oil and gas for decades to come, in a global energy system in a long-term transition to lower carbon fuels. As well as low oil prices today, we are seeing higher levels of price volatility, due to geopolitical change, the speed of information flows, and the pace of innovation in our sector.”

“By capping our capital spending in the period to 2020, investing in compelling projects, driving down costs and selling non-core positions, we can reshape Shell into a more focused and more resilient company, with better returns and growing free cash flow per share,” he added.

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