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Shell to Sell Stake in Australian Gas Field

Screen Shot 2013-01-23 at 13.17.19“All too often, Shell’s answer to an issue or problem is that the market is being too short term; that Shell takes the long term view, and that in the long term, the company’s approach will be proved right,” Lucas Herrmann, an analyst at Deutsche Bank in London, wrote in a note to clients on Monday. “Sadly, we would argue that the weight of evidence is, if anything, against the company.’’: Mr. Rats estimates that Shell will have to sell $14 billion worth of assets over the next two years to keep its commitments on reining in capital spending. He forecasts that it will sell oil fields in the North Sea, where it owns a smorgasbord of stakes in oil and natural gas fields; in Nigeria, where Shell’s production has been cut by unrest; and in North America, where the company has been losing money.

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By STANLEY REED: JAN. 20, 2014

LONDON — Royal Dutch Shell said on Monday that it would sell its minority interest in an Australian liquefied natural gas project to the Kuwait Foreign Petroleum Exploration Company for about $1.1 billion.

The sale is likely to be one of many in the oil industry this year, as companies try to raise cash for other projects or to finance share buybacks and higher dividends.

Even though global oil prices are relatively high, with Brent crude trading at about $106 a barrel, profit at many oil companies has been disappointing and the stock performance of some companies, including Shell, has been lackluster. Shares of Shell were slightly lower on Monday afternoon in London.

“All too often, Shell’s answer to an issue or problem is that the market is being too short term; that Shell takes the long term view, and that in the long term, the company’s approach will be proved right,” Lucas Herrmann, an analyst at Deutsche Bank in London, wrote in a note to clients on Monday. “Sadly, we would argue that the weight of evidence is, if anything, against the company.’’

At the same time, large oil companies have accumulated huge collections of oil fields and other assets over the years, through their own exploration and development activities and through acquisitions of smaller companies. Selling properties that they no longer consider vital is a way of trying to appease investors.

The sales also help companies conserve capital. “We are refocusing our investment to where we can add the most value with Shell’s capital and technology,” Shell’s chief executive, Ben van Beurden, said in a statement on Monday. “We are making hard choices in our worldwide portfolio.”

The company’s stake in the Wheatstone project, in the Carnarvon Basin off Western Australia, is typical of the kind of asset that oil companies may want to sell. Shell does not control the project, which is operated by Chevron. Wheatstone is still under construction, and labor and other costs have become expensive for the oil industry in Australia. The Kuwaitis were already partners in Wheatstone.

Mr. van Beurden, who took over as the head of Shell from Peter Voser less than three weeks ago, seems determined to shake things up. He surprised investors on Friday by warning that Shell’s earnings for the fourth quarter of 2013 would be 48 percent lower than a year earlier.

Shell’s recent performance is a good illustration of the trends in the industry that have disappointed investors. In recent years, capital investment in the industry has soared, more than doubling from 2005 to 2012, but it has not produced solid returns. Rising costs have trimmed profit margins, while oil companies have plowed much of their earnings back into projects that are becoming more expensive.

At Shell, capital investment rose to an estimated $45 billion last year from $27 billion in 2007, while returns on capital employed, an important measure of profit in the industry, declined to 9 percent last year from about 20 percent as late as 2008, according to estimates by Martijn Rats, an analyst at Morgan Stanley in London.

“Shell’s profit warning fits in a longer-term trend of pressure on returns and deteriorating free cash flow,” Mr. Rats wrote in a research note on Monday.

Selling assets is one way of trying to soothe investors. The sales raise money that companies can spend on projects or to finance increased dividends or share buybacks, and they also reduce the need for capital spending. The chief financial officer at Shell, Simon Henry, said last year that the company would pick up its pace of asset sales, a trend that Mr. van Beurden may accelerate further.

Mr. Rats estimates that Shell will have to sell $14 billion worth of assets over the next two years to keep its commitments on reining in capital spending. He forecasts that it will sell oil fields in the North Sea, where it owns a smorgasbord of stakes in oil and natural gas fields; in Nigeria, where Shell’s production has been cut by unrest; and in North America, where the company has been losing money.

“We are at a point where so much of the money being earned needs to be reinvested in the businesses that there isn’t much left for shareholders,’’ Mr. Rats said during an interview on Monday. He said that over the past four quarters, the five major European oil companies — BP, Shell, Total, Eni and Statoil — had negative cash flow of $2 billion, not counting asset sales, while promising dividends of $35 billion. The likely to way to fill the hole is through faster disposals of assets, he said.

Shell is far from being the only company that may make major disposals. BP kicked off the trend after the Gulf of Mexico disaster in 2010 forced it to raise cash. BP was pleasantly surprised by how much money — $38 billion to date — it was able to raise from these sales, and has made a virtue of necessity. The company now says it will pursue an additional $10 billion in disposals, partly to fund buybacks.

BP may be plagued by problems, including continuing litigation in the United States, but its chief executive, Robert W. Dudley, does seem to be listening to investors. “We understand that we have to prove ourselves capable of running major global portfolios and balancing investment against returns,” Mr. Dudley told analysts last autumn.

Eni, the Italian energy giant, has also been putting properties on the block. Last year it sold a stake in its giant Mozambique gas discovery for $4.2 billion, and executives have said they are open to selling more in Mozambique and elsewhere. “We are reducing our working interest in some giant projects,” Claudio Descalzi, Eni’s head of exploration and production, told analysts in October. “We are starting also a restructuring of our portfolio.”

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