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Royal Dutch Shell Merger Completion Results in Serious Debt Woes

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By Micheal KaufmanMay 20, 2016 at 2:09 pm EST

The energy sector has been badly affected due to substantial decline in oil and gas price. This has forced companies to implement counter steps such as capital expenditure reduction and asset disposals.

Royal Dutch Shell plc (ADR) (NYSE:RDS.A), a major oil company, is reportedly looking for buyers for its North Sea assets. The assets had been mainly bought during its multibillion takeover of BG Group.

According to a report by Bloomberg, the company is in talks with chemical producers including privately owned Neptune Oil and Gas and Ineos Group AG, established by former CEO of Centrica Sam Laidlaw. Shell could look to sell a package of assets and want to gauge buyers’ sentiments before formal assets disposals process is launched. With no final decision been made yet, there is also a possibility that the assets might be retained.

Assets Disposal Plan

In March, Shell had investment bank advise it on the $30 billion worth of asset disposals according to Thomson Reuters. The company plans to raise $30 billion through asset divestments in the next three years. The high level of asset disposals is driven by $54 billion takeover of BG Group that led its credit rating downgrade by credit rating agency.

The merger allowed the company to become the second largest energy company, in terms of market value. By acquiring BG, Shell received ownership of assets located in North Sea, where costs are high generally. With oil price continuing to trade below $50 per barrel, it will be difficult for Shell to obtain favorable bid for its assets.

Debt Issue and Free Cash Flow

Low oil prices have dented the company’s profitability. Additionally, Shell’s announcement to acquire BG has led the leverage ratios to aggravate. Increasing debt and falling free cash flow (FCF) remains a serious concern for Shell. The company’s recent efforts aim to address these issues. Following table summarizes Shell’s debt and free cash flow from 1QFY15.

When the deal was initially announced in April 2015, oil was changing hands at $59 per barrel. With the completion of the deal, it is now under $50. The 10 months have led crude oil to drop below $30 per barrel, further adding to the company’s financial woes.

The drastic decline in crude oil price has led several oil companies to squeeze their operations, paired with curtailment in investment programs. In a bid to tackle low oil price, Shell announced layoffs, disposed of assets worth billions and reduced operating and capital expenses. The reduction was mainly in North Sea, where cost of production is quite high.

Following the acquisition, Shell’s total debt soared to $80 billion, making it Europe’s “most indebted non-financial company”. Its net debt-to-total cap increased from 14% in 4QFY15 to 26% in1QFY15.

BP’s Exposure in North Sea

BG’s official website states the company has oil and gas assets in UK North Sea. This includes three infrastructure hubs, known as Armada, Lomond and Everest. It also has ownership in non-operated assets such as Total’s operated Elgin and Franklin – gas consolidated fields – and Nexen’s Buzzard oil. Royal Dutch Shell has comparatively older assets in UK North Sea, including Brent Projects, which is now the global benchmark for oil prices.

Editing by Asad Rizvi; Graphics by Ahsan Haque

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