How Shell Plans to Keep Its Spending in Check
Though investors have been rightfully concerned about Royal Dutch Shell's high level of capital spending, expected to reach $45 billion this year, recent comments by CEO Peter Voser should allay these concerns to some extent. Let's take a closer look at how Europe's largest oil company plans to keep spending in check over the next few years.
Shell's asset sale option
Speaking at Shell's headquarters in The Hague, Voser said that the company can sell additional assets over the next few years to offset its high capital spending. "We are entering into a divestment phase like we had a few years ago," he remarked in an interview with Bloomberg.
Over the period from 2012-2015, Shell expects to spend as much as $130 billion. Having already spent $30 billion last year and with plans to spend $45 billion this year, that leaves just $55 billion for 2014 and 2015. That means the company will need to bring in at least $15 billion through asset sales if it is to meet its expected spending forecast of roughly $35 billion over the next two years.
While Shell has seen the largest year-over-year increase in capital spending this year among the integrated oil majors, it's not the only one spending heavily. Earlier this year, ExxonMobil said that its capital spending would rise by about $1 billion per year over the next five years, while Chevron has suggested that its expected capital budget of $36.7 billion this year will come in 10% higher than the company's previous guidance, though spending next year will likely remain within $33 billion-$36 billion.
Total , on the other hand, actually plans to reduce capital spending over the next few years. Earlier this year, the French oil major announced that its spending will peak this year at $28 billion to $29 billion and decline to between $24 billion and $25 billion over the period from 2015-2017. Investors viewed the news as positive, sending shares of Total up about 9% over the past three months.
Balancing acquisitions with asset sales
Part of the reason Shell spent so heavily this year is because the company went on something of an acquisition spree, purchasing LNG assets from Spain's Repsol for $6.7 billion back in February and purchasing an interest in Brazil's vast Libra oil field for $1.4 billion last month.
At the same time, however, it has put up several assets for sale, including 106,000 leasehold acres in the Eagle Ford shale of Texas, 600,000 acres in Kansas' Mississippi Lime play, its stake in the Mahogany shale oil project in Colorado, as well as oil blocks in Nigeria.
Going forward, the company plans to sell additional oil and gas assets in the U.S., Nigeria, and potentially other regions where it operates, and may also divest certain retail and refinery interests, according to Chief Financial Officer Simon Henry.
The bottom line
Given Shell's robust portfolio of oil and gas projects slated to come on stream over the next couple of years, it may just be able to afford $15 billion worth of asset sales. For instance, five new high-margin oil projects, including Mars-B and Cardamom in the Gulf of Mexico, expected to start up next year will boost the company's cash flow by an expected $4 billion in 2015.
Moreover, many of Shell's biggest capital investments have been in LNG projects, which require huge up-front capital expenditures, though they should pay off handsomely over the long run. That's because they're long-life assets with flat production profiles that should generate strong and reliable cash flows for decades into the future, leaving the company with excess cash that can be reinvested in more lucrative opportunities or returned to shareholders.
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Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Chevron and Total SA (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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