Shell Seeks to Streamline in 2017 -- WSJ
January 04 2017 - 3:02AM
Dow Jones News
Executing asset sales is crucial for reducing debt and retaining
shareholder confidence
By Sarah Kent
LONDON -- Royal Dutch Shell PLC has a goal for 2017: Slimming
down.
The British-Dutch oil-and-gas giant bulked up in February with
the roughly $50 billion acquisition of BG Group PLC, giving Shell a
dominant position in liquefied natural gas and some of the world's
most prized offshore oil fields in Brazil. It also saddled the
company with a mountain of debt -- $78 billion at the end of the
third quarter -- that is higher than peers such as Exxon Mobil
Corp.
The company helped sell investors and analysts on the value of
the BG deal by promising to unload $30 billion in assets from 2016
through 2018. Not only would it help pay down some of that debt,
but it would prune some unloved assets and shore up confidence that
the company could keep paying dividends and provide cash for a
share buyback that could begin as soon as 2017.
But in 2016, Shell announced details of asset sales amounting to
only about $5 billion -- short of the $6 billion to $8 billion the
company had said it would reach last year. As recently as November
, Shell's Chief Financial Officer Simon Henry said the company
expected to hit that target.
The company declined to comment. Shell has said it is likely to
back-end its divestment program and is more concerned with making
sure it gets good value for the sales.
Executing more deals is crucial for retaining shareholder
confidence in Shell's ability to keep paying its dividend and
reduce its debt levels. Its debt-to-equity ratio of 29% is higher
than its four major competitors: Exxon, Chevron Corp., BP PLC and
Total SA.
"Shell's high net debt and the slow progress against its
divestment plan are the last major concerns for investors, with the
view that it remains the key risk for a dividend cut," said
research firm Sanford C. Bernstein in a note.
Deal making was slow across the energy sector in 2016, when oil
prices often were below $45 a barrel. With Brent crude, the
international benchmark, now hovering around $56 a barrel, there is
hope among investors and analysts that Shell can start selling off
unwanted assets for a fair price.
"This is a three-year plan and we're starting to see the oil
price start to recover, which is helpful," said Simon Gergel, chief
investment officer for U.K. equities at Allianz Global Investors.
"I would be pretty confident they can get a long way down the road
in the three years."
Deal making in the sector already seems to be picking up, with
BP announcing a flurry of agreements in the past month.
Shell was on its own year-end spree, announcing the completion
of a tricky plan to sell its stake in a Japanese refining joint
venture for $1.4 billion and an agreement to give up its Australian
aviation-fuels business for $250 million.
Those are positive steps but still came in shy of its $6 billion
to $8 billion range for 2016.
The company has said it is already working on 16 asset sales
with a value of more than $500 million and is expected to close
some of them early this year. That is likely to include a package
of fields in the North Sea worth about $3 billion and assets in
Gabon worth nearly $1 billion, according to a person familiar with
the situation.
Shell is reviewing whether to sell operations in New Zealand and
Thailand, among other places. In Iraq, the company is in
discussions to sell its stake in the West Qurna oil field to a
Japanese consortium, people familiar with the matter said.
Many of the assets Shell sold in 2016 were from its refining and
marketing division, which has proved more resilient to the
oil-price slump and an easier place for deal making. But deals for
exploration and production assets have proved harder and could
remain difficult even if oil prices hover around $55 to $60 a
barrel in 2017 -- more than 20% higher than 2016's average.
In the energy sector, buyers and sellers in many cases are still
struggling to find a balance on the question of pricing assets,
according to analysts. Iain Reid, senior oil-and-gas analyst at
Macquarie, said Shell seemed determined to sell at a price of its
choosing, which could push the completion of its asset-sale plan
beyond 2018.
"Shell is not prepared to sacrifice too much," Mr. Reid
said.
--Michael Amon contributed to this article.
Write to Sarah Kent at sarah.kent@wsj.com
(END) Dow Jones Newswires
January 04, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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