Royal Dutch Shell cuts spending by $5 billion, suspends share buyback

Royal Dutch Shell will lower spending by $5 billion and suspended its vast $25 billion share buyback plan in an effort to weather the recent collape in oil prices, it said on Monday.

The Anlgo-Dutch oil major said it would reduce capital expenditure to $20 billion or below from a planned level of about $25 billion while seeking to reduce operating costs by an additional $3 billion to $4 billion over the next 12 months.

The cuts are expected to boost Shell’s cash generation by between $8 billion and $9 billion on a pretax basis.

Shell’s shares were down 3.5 per cent in early London trading, against a 3 per cent for the broader European energy sector.

Oil prices have crashed by more than 60 per cent since January, hit by global demand destruction because of the coronavirus pandemic and a price war between top producers Saudi Arabia and Russia after this month’s collapse of a supply pact between the Organization of the Petroleum Exporting Countries (OPEC) and its allies.

The Shell cuts mirror moves by rivals such as Exxon Mobil, Chevron, BP and France’s Total, who have all announced plans for sharp reductions in spending.

Shell Chief Executive Ben van Beurden in January said that the company requires $20 billion of its capital spending to sustain operations at current output levels, with additional spending dedicated to growing its business, including $2 billion to $3 billion for building up its power and low-carbon energy business.

All of Shell’s business segments are reviewing spending to achieve the targeted cuts, a company spokeswoman said.

“The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past,” van Beurden said in a statement.

Even before the coronavirus outbreak, Shell faced weaker revenue because of slowing demand for petrochemicals, which led it to slow its $25 billion three-year share buyback programme late last year.

Shell has so far purchased $15.5 billion of shares since the buyback programme started in July 2018, it said.

“We will continue to review the dynamically evolving business environment and are prepared to take further strategic decisions and consider changes to the overall financial framework as necessary,” the company said.

Meanwhile the French energy group Total announced plans on Monday to step up cost cuts and suspend its share buyback programme in order to deal with a slump in oil prices and the economic fallout from the coronavirus outbreak.

Total CEO Patrick Pouyanne said that with prices of $30 per barrel, Total would now target organic capital expenditure cuts of more than $3 billion.

In a video message to the company’s staff last Thursday, Pouyanne said the group was facing three crisis - the corornavirus outbreak, the crash in oil prices due to a sharp fall in global oil demand just as supply is expected to rise, and the climate change crisis.

“In the face of this crisis, we need to react,” Pouyanne said.

“We have a $9 billion hole and we want to plug it. To reduce it, we will act with the various levers that we have.”

Pouyanne said that out of the $3.3 billion in cost savings, $2.5 billion will come from exploration and production, $300 million from gas, renewables and power, $300 million from refining and chemicals, and $200 million from the marketing and services division.

The company will also target $800 million in 2020 operating cost savings compared to 2019, instead of the $300 million previously announced, and suspend its share buyback programme.

Total had planned $2 billion of share buybacks this year and Pouyanne said it had carried out $500 million so far.

“So we are saving $1.5 billion on our plan,” he said.

He added that recruitment would not be completely frozen, but reduced substantially.

“The markets are currently moving a lot, but our liquidity, our cash flow is high: we have more than $10 billion. We can deal with this financial crisis,” Pouyanne said.

Royal Dutch Shell, commonly known as Shell, is a British-Dutch oil and gas company headquartered in the Netherlands and incorporated in the United Kingdom.

 It is one of the oil and gas “supermajors” and the third-largest company in the world measured by 2018 revenues (and the largest based in Europe).[5] In the 2019 Forbes Global 2000, Shell was ranked as the ninth-largest company in the world (and the largest outside China and the United States), and the largest energy company.

Reuters