May 17, 2016
Royal Dutch Shell plc (NYSE:RDS.A) is divesting US$40 billion in non-core assets in its attempt to cut capital expenditures and raise cash in a desperate attempt to right its balance sheet wrongs after its takeover of BG Group plc earlier this year left it strapped for cash and laden with nearly US$81 billion worth of debt.
The costly merger at a time of depressed oil prices has rendered Shell the largest publicly owned company in the UK and the largest producer of liquefied natural gas (LNG) in the world.
Shell’s massive debt rose from US$43.84 billion to US$80.87 billion from Q1FY15 to Q1FY16, while free cash flow fell from US$.53 billion to -$5.06 billion over the same period.
Unfortunately for Shell, as far as oil assets go, it’s a buyer’s market, with drilling rigs and the like selling for 10 percent of their value during “normal” times. But divest it must, so it’s quite possible that Shell will be forced to take drastic measures and issue an initial public offering (IPO) to lighten its load.
Simon Henry, Shell’s CFO, confirmed that an IPO was a possible solution, and that he expected this move would help to lower Shell’s net debt by over $50 billion over the next four years. “There are no prima facie reasons why we would not look at such a monetization route, if that was the best way to create value.”
An IPO of Shell’s mature assets would allow Shell to still benefit from any future oil recovery, if there is indeed an oil recovery on the horizon.
A decision on how to implement the divestment is not expected anytime soon, although analyst Aneek Haq of Exane BNP Paribas believes that an IPO announcement could be made within a year.
Shell has also established a separate division, New Energies, to invest in renewable and low-carbon power just days after Chatham House warned international oil companies that they were no longer well-suited for today’s low crude prices and tightening climate change regulations. Shell has made no official announcement about the $1.7 billion in capital investment for New Energies, but an announcement is expected sometime in June.
By Charles Kennedy of Oilprice.com
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