Is Royal Dutch Shell plc Getting Cold Feet in Australia?

Royal Dutch Shell , Europe's largest oil company by market value, recently announced that it will divest its stake in a major Australian energy venture. Does the Anglo-Dutch energy giant's decision signal a broad retrenchment from its oil and gas ventures in Australia, or are there other factors at play? Let's take a closer look.

Shell backs out from Wheatstone
Earlier this week, Shell said it would sell its 8% stake in the Wheatstone-Iago Joint Venture and its 6.4% stake in the massive Wheatstone liquefied natural gas project to the Kuwait Foreign Petroleum Exploration Co. (KUFPEC) for a cash consideration of $1.135 billion.

The Wheatstone LNG project offshore western Australia slated to go into service by 2016 with a total capacity of 8.9 million tonnes per annum, or MTPA. Chevron serves as the project's operator, with a 64.14% interest, along with joint venture partners Apache , which maintains a 13% stake, and state-owned KUFPEC, which will have a 13.4% stake after the transaction with Shell closes.

Shell's decision to withdraw from the project mainly reflects the company's plans to improve its capital efficiency by focusing only on its highest-value opportunities, as opposed to signaling a broader retreat from Australia or from LNG projects. Indeed, Wheatstone was Shell's smallest position in Australian LNG and the company is still committed to three other major Australian projects.

Still committed to Australian LNG
Shell maintains a 24.27% interest in the North West Shelf LNG project; a 67.5% controlling stake in the Prelude Floating LNG project; and a 25% interest in the Gorgon LNG project, the largest single resource project in Australia.

Gorgon, which is under construction by operator Chevron, as well as joint venture partners ExxonMobil and Shell, which each hold a 25% stake in the project, is one of the most expensive projects being undertaken by Shell and is expected to increase the company's net production by more than 100,000 barrels of oil equivalent per day after entering service in mid-2015.

However, even though Shell remains committed to these and additional Australian LNG projects, it may part ways with other assets in the country.Some analysts believe the company may divest its 23.1% stake in Australia's Woodside Petroleum , which is worth more than $6  billion. It is also seeking a buyer for its 120,000 barrels-per-day Geelong refinery in Victoria, as part of a broader push to downsize its chronically underperforming refining division.

Keeping spending in check
Shell's decision to back out of these and other projects is part of an overarching strategy to keep spending within its operating cash flow. Though the company's net capital expenditures came in at $44.3 billion last year, higher than its operating cash flow of $40.4 billion, the combination of asset sales and a wave of new high-margin oil projects slated to start up over the next two years should help reverse the trend.

From 2012 to 2015, Shell expects to generate cash flow of $175 billion-$200 billion, as compared to targeted net capex spending of $130 billion. To help meet that goal, it may part ways with as much as $15 billion worth of additional assets in 2014 and 2015, having already put up for sale several of poor performing assets in Kansas' Mississippi Lime play, Texas' Eagle Ford shale, and Nigeria's eastern Niger Delta region.

The Foolish takeaway
Far from signaling a retreat from LNG, Shell's decision to sell its stake in the Wheatstone project simply reflects the realities of a company tightening its purse strings and seeking to improve capital efficiency. The company is still very much committed to LNG and expects its integrated gas portfolio to account for a larger share of its earnings and cash flow in the years ahead.

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