Rolls-Royce to raise $6.5 billion to overcome major cash crunch

Rolls-Royce plans to raise a total of 5 billion pounds ($6.5 billion), including 2 billion pounds from shareholders, to rebuild its balance sheet as the coronavirus travel crisis wreaks havoc on the British aircraft engine maker’s cashflow.

Airlines pay Rolls-Royce based on how many hours its engines fly in larger jets and worries over the slump in long-haul travel have knocked 80% off the value of its shares this year.

Rolls-Royce, whose engines power the Boeing 787 and Airbus 350, said in May it would cut 9,000 jobs as a result of the pandemic and its finances have been under intense scrutiny.

“The capital raise announced today improves our resilience to navigate the current uncertain operating environment,” Chief Executive Warren East said on Thursday.

Rolls said in a statement that despite a cash outflow of 4 billion pounds this year, it expected to return to positive cashflow during the second half of next year and was targeting 750 million pounds of free cashflow in 2022.

It said that this was dependent on long-haul travel recovering. As a second wave of the coronavirus has surged across Europe, airlines have said that it will be 2024 before people are flying as much as they did in 2019.

With a market capitalisation of just 2.5 billion pounds, Rolls said that a 10 for 3 heavily discounted rights issue was fully underwritten at 32 pence per share, a 41% discount to the closing price of 130 pence per share on Wednesday.

The rights issue is subject to approval by shareholders at a general meeting expected to be held on October 27.

Conditional upon completion of the rights issue, additional debt options will open up said Rolls, a key supplier to the government on military programmes.

The British government’s UK Export Finance has indicated it was ready to support an extension of its 80% guarantee of Rolls’ existing 2 billion pound five-year term loan. It would support a loan amount increase of up to 1 billion pounds.

Rolls, which also said it had commitments for a new two-year loan facility of 1 billion pounds, made no reference to who was backing the rights following media reports that Middle Eastern sovereign wealth funds were interested in doing so.

SHELL JOB CUTS: Royal Dutch Shell announced on Wednesday plans to cut up to 9,000 jobs, or over 10% of its workforce, as part of a major overhaul to shift the oil and gas giant to low-carbon energy.

Shell, which had 83,000 employees at the end of 2019, said that the reorganisation will lead to additional annual savings of around $2 billion to $2.5 billion by 2022, going partly beyond cuts of $3 to $4 billion announced earlier this year.

Shell’s London-traded shares were up 0.15%, compared with 0.9% gains for the broader energy sector.

Last month it launched a broad review of its business aimed at cutting costs as it prepares to restructure its operations as part of the shift to low-carbon energy.

The Anglo-Dutch company said it expected to cut 7,000 to 9,000 jobs by the end of 2022, including some 1,500 people who have agreed to take voluntary redundancy this year.

Rival BP this year announced plans to cut around 10,000 jobs as part of CEO Bernard Looney’s plans to rapidly expand its renewables business and reduce oil and gas production.

Reducing costs is vital for Shell’s plans to move into the power sector and renewables where margins are relatively low.

Competition is also likely to intensify with utilities and rival oil firms including BP and Total all battling for market share as economies around the world go green.

“We have looked closely at how we are organised and we feel that, in many places, we have too many layers in the company,” CEO Ben van Beurden said in an internal interview published on Shell’s website.

In an operations update, Shell also said its oil and gas production was set to drop sharply in the third quarter to around 3.04 million barrels of oil equivalent per day due to lower output as a result of the coronavirus pandemic and hurricanes that forced offshore platforms to shut down.

Shell, the world’s largest fuel retailer, saw a recovery in fuel sales in the third quarter from lows hit in the previous quarter as some countries gradually emerged from lockdown measures.

In the second quarter, Shell narrowly avoided its first quarterly loss in recent history, helped by a booming trading business. It however announced nearly $16.8 billion in impairment charges after sharply lowering its outlook for oil and gas prices in the wake of the pandemic.

Reuters