Oil giant Royal Dutch Shell has announced that it is to make a further $1 billion worth of spending cuts in order to better cope with its £35 billion takeover of the BG Group.
Shell’s purchase of the rival group was finalised earlier this year and is the largest deal of its kind to go through in the past decade.
When the deal went through, Shell had to embark on a series of planned spending cuts in order to balance their books given the size of the increased debt that had to be taken on as a result. Following the deal, Shell’s debt as a percentage of its capital grew to 26%.
They have since upgraded their estimated pre-tax cost savings to be made by 2018 from $3.5 billion to $4.5 billion, with the aim of reducing their total debt over time.
Speaking to investors on Tuesday, the head of Shell, Ben van Beurden, said: “The BG deal is an opportunity to accelerate the reshaping of Shell. Integration is gathering pace, and today we expect to deliver more synergies, and at a faster rate.”
Van Beurden maintained that the various other cost-saving measures that the company has announced at the deal’s finalisation were to hold true.
These include plans to sell $30 billion worth of assets by 2018, although a source told the Financial Times earlier this week that, while the deadline for the asset sale still officially holds, it could end up being pushed back, depending on the value of the offers that Shell receives for the relevant assets.
Shell plan to hopefully make $6 to $9 billion worth of these asset sales by the end of this year.
Other plans involve reducing capital spending for the next year, keeping it between $25 and $30 billion, as well as reducing operating costs generally to $40 billion – 20% less than the accumulative spending on operations from Shell and BG last year.
They also intend to reduce the amount spent on investment by around 35% compared to the two company’s figures for last year, capping it at around $29 billion.
The debt taken on by this merger is just one cause of Shell’s recent financial trouble – the company’s cash flow took a big hit last year as oil prices plummeted from highs of more than $115 a barrel down to below $30 a barrel over the course of about 18 months.
Commenting on the planned spending cuts, van Beurden said: “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 focused and more resilient company, with better returns and growing free cash flow per share.”
Van Beurden’s refocusing and reinvestment plans include putting more effort and capital into its liquefied natural gas (LNG) business, as well as into low carbon fuel sources as part of its New Energies renewables arm, although the latter is expected to remain a very small part of Shell’s portfolio for at least another decade.
