By LAURA CHESTERS FOR DAILY MAIL: 3 November 2015

Royal Dutch Shell chief executive Ben van Beurden is the oil industry’s equivalent of a swan – below his calm demeanour he is furiously paddling to keep his planned £40billion mega-deal afloat.

Shell is buying rival BG Group and, to get the deal away and for it to make sense as the oil price plummets, van Beurden has taken the knife to Shell’s costs and projects.

Investors have been getting jittery as the price of oil has halved since summer 2014 and has stubbornly remained below $60 a barrel since the takeover was announced in April. Brent Crude continues to fluctuate but experts predict the price will stay ‘lower for longer’ than may have been expected.

However, van Beurden, who took on the top job last January and has a lot riding personally on the deal, promises it will still work with an oil price in the mid-$60s a barrel. Yesterday he insisted: ‘Although oil prices have fallen in 2015, the valuation case for the BG acquisition still looks compelling today for both sets of shareholders.’

BG shares currently trade more than 10 per cent lower than the valuation of the cash and shares deal, betraying how concerned investors are. It still has to get the go-ahead from a number of regulators, including in Australia and China, but van Beurden hopes to complete it by next year.

It has been a painful process. The need to cut costs to make the deal possible has already led to the loss of more than 7,500 jobs, made up of redundancies, contractor cuts and the departure of those who have left the group with the sale of its assets.

Projects have been ditched, including the high-profile Arctic exploration, and last week Shell announced the culling of its Carmon Creek oil sands project in Canada. Pulling out of Arctic exploration cost it £1.7billion and helped it report a whopping £4.8billion quarterly loss last week.

Investors might think van Beurden should have lots of regrets, but yesterday he only admitted to ‘just’ regretting that there wasn’t ‘any significant quantities of oil’ found in the Arctic.

Shell has committed to sell a total of more than £30billion of assets by 2018 to cover the cost of the takeover, which van Beurden said will make it ‘more focused, more resilient and more competitive’.

At yesterday’s update he attempted to cheer investors by revealing Shell had doubled its cost-cutting efforts to £1.3billion, which will increase ‘synergies’ from the BG takeover and boost cost savings by 40 per cent more than previously expected to £2.3billion pre-tax by 2018.

Buying BG gives Shell access to its lucrative gas projects that will allow it to pay off debts and continue to pay the dividends and implement the share buy backs that it has promised.

Investors are largely attracted to Shell for its dividend-paying powers – it is the top payer of the entire FTSE 100. Shell has promised to maintain its dividend this year and next at $1.88 a share and undertake a share buyback of at least £16billion between 2017-2020.

As part of the cost cutting it is also reorganising its exploration arm, known as upstream.

Marvin Odum, director of upstream in the Americas, will lead a new ‘unconventional resources’ business which will include American shale oil. The cuts will also mean that the combined group’s spending will be around £23billion next year.

But some in the City believe that van Beurden must paddle even harder and swing the axe more vigorously still.

Deutsche Bank’s oil experts say: ‘Shell is just not being pro-active enough at tackling cost structures in its upstream.

‘Relative to peers there was little here to afford investors comfort that as a standalone [company] Shell can work at $60 a barrel.’

Brendan Warn, oil analyst at BMO Capital Markets, said: ‘The BG deal will make Shell a far better company beyond 2017, but until then a lot of divestments and levers need to be pulled to cover the dividend.’

Like the City experts, van Beurden knows just how important the BG deal is – to investors and for his career.

FULL ARTICLE

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