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Shell Will Struggle to Overcome Oil Price Crash, say Analysts

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Stephen Simko, CFA: 26 October 2015

Even when oil prices were $100 a barrel, Shell’s (RDSB) portfolio was strewn with problems. Huge bets on shale destroyed huge amounts of capital, and the company’s upstream resource base has few growth options with strong economics, the low-cost Brazilian oil it is acquiring from BG (BG.) is the one major exception.

The company’s chronically poorly performing downstream also has been a consistent drag on returns on capital. Even though significant restructuring actions have begun under new CEO Ben van Beurden, the recent collapse in oil prices adds considerable pressure that we think the company will struggle mightily to overcome. After all, Shell’s issues of poor execution and capital efficiency predate even ex-CEO Peter Voser, who was responsible for a lot of the poor recent strategic choices.

Thus far, van Beurden has done all he can, and oil companies surely will be able to cut costs significantly from here to better align themselves with the new oil price environment. But investors should not expect miracles; Shell isn’t Exxon or Chevron and probably never will be. Improvements are indeed likely, but the firm is far more likely to remain a laggard than become a leader among the oil majors for the rest of this decade.

Once finalized, the BG deal will see Shell’s proved reserves and current production increase 25% and 20%, respectively. Of BG’s assets, the crown jewels are its Brazilian oil interests in the Santos Basin, which are estimated to hold more than three billion barrels of recoverable oil resources. These oil fields have the potential to be producing 500 thousand barrels per day by the end of the decade.

Critically, BG was an early entrant into Brazilian presalt and was given fiscal terms that are far more generous than are currently on offer for new projects – such as Shell’s stake in Libra, given the changes to Brazil’s petroleum laws. We estimate BG’s Brazilian assets can break even at roughly $30-$35 per barrel, making this some of the lowest-cost oil in the world. That said, Petrobras is the operator, which increases risk, given the bevy of issues that firm faces. 

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