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Shell caps spending for rest of the decade as belt tightening continues

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By Jon Yeomans7 JUNE 2016 • 9:33AM

Oil giant Shell is targeting yet more cost savings as it looks to pay down debt and protect its dividend in an era of lower oil prices.

The Anglo Dutch giant said today capital spending would be in the range of $25-$30bn a year to 2020. For 2016 it will be $29bn, down from a forecast “trending toward” $30bn, which was itself down from an earlier projection of $33bn.

The company said this spending could go even lower if oil prices sink below their current levels, but crucially would not go higher if oil surges. Crude has stabilised at around $50 a barrel, after hitting a 12-year low of $28 a barrel in January. It was trading at more than $100 two years ago. 

Shell also expects to save more money than previously thought from its multi-billion takeover of Reading-based BG Group.

It has pencilled in $4.5bn (£3.1bn) of cost savings from its £40bn merger with liquid natural gas (LNG) specialist BG earlier this year, up from $3.5bn.

Asset sales are expected to be $30bn for 2016-18, with up to 10pc of Shell’s oil and gas production earmarked for disposal. The company plans to quit five to 10 countries as part of this retrenchment, with $6bn-8bn in asset sales realised this year alone.

Ben van Beurden, chief executive, said he expected “robust demand” for oil and gas in the coming decades.

“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 focussed and more resilient company, with better returns and growing free cash flow per share,” he said.

Mr van Beurden was speaking ahead of Shell’s capital markets day in London. He outlined chemicals production and deep water drilling as two key growth areas for the oil major. Through its acquisition of BG, Shell has acquired valuable deepwater sites in Brazil and the Gulf of Mexico, which it said “represent the best real estate in global deep water”.

Shell also announced it will build a new chemicals plant in Pennsylvania. This will use natural gas from shale production to produce petrochemicals used in manufacturing.

Analysts will be keeping a close eye on how Shell manages its debt load, which has increased to 26pc of its total capital since the BG merger, up from 14pc at the end of 2015. Last month it announced 2,200 job cuts, on top of 7,500 it made last year, and has called for voluntary redundancies at the former BG Group headquarters. BG employed just over 5,000 people before the takeover.

“The main focus for us is on the ability of the combined company to generate free cash flow and pay a dividend that the market still seems reluctant to believe is sustainable,” said analysts at Barclays. “The statement this morning should be reassuring in this regard with the priorities of debt reduction and dividend payments remaining unchanged.”

“Overall, we read the statement as positive, and expect Shell to reverse some of its underperformance versus peers in recent days,” added Biraj Borkhataria, analyst at RBC Capital Markets, in a note to clients.

Shell’s B shares rose 2.6pc in morning trade.

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