Shell Cuts $2b in Spending

Shell Cuts $2b in Spending
Shell Cuts $2b in Spending

Royal Dutch Shell, Europe’s largest oil company, further reduced spending plans for this year and 2016 as it prepares to take over BG Group amid slumping prices for crude.

The combined company plans $33 billion of capital spending next year, lower than Shell’s previous target of $35 billion, it said on Tuesday.

Shell also cut its spending forecast for this year by $1 billion to $29 billion, Bloomberg reported.

Crude oil’s collapse to less than $37 a barrel from about $55 on the day the deal was announced in April has prompted some investors to question whether Shell is paying too much.

The oil producer has justified the deal by saying that it boosts its ability to maintain dividends, makes it the world’s biggest liquefied natural gas company and gives it oil and gas assets from Australia to Brazil.

“The two companies are combining during a low oil-price environment and cutting their spending plans makes a lot of sense,” said Jason Gammel, a London-based analyst with Jefferies International Ltd. “This moves the plans for the deal forward.”

Shell expects operating costs to fall by $4 billion this year, about 10% lower than last year and by $3 billion in 2016.

The acquisition will break even with Brent crude prices in the low $60s and add to operating cash flow per share at $50 a barrel in 2016, the company said in a statement. It expects the deal to be accretive to earnings per share, excluding identified items, in 2017 at $65 Brent.

Shell’s shareholders are scheduled to vote on the acquisition on Jan. 27 and BG’s the next day. It requires the backing of 50% of its holders. In BG’s case, votes in favor must represent at least 75% of the total value of BG shares. The merger is likely to become effective on Feb. 15, Shell said.

“The combination with BG represents a tremendous opportunity to create value for both sets of shareholders, particularly in deep water and [liquefied natural gas],” Shell's chief executive, Ben van Beurden, said in a statement.

It is “a strong platform to refocus the company, to create a simpler and more competitive Shell”.

The company's president, John Hofmeister, also predicted on Tuesday the recent leg lower in crude prices is no surprise and market watchers should expect the oil rout to get worse before it gets better.