Royal Dutch Shell: Stay Cautious Despite Optimization Efforts

Royal Dutch Shell (RDS.A) (RDS.B) is not in the best of health this year as the company’s financial performance has taken a hit on the back of weak oil and gas prices. However, the ongoing cost-optimization efforts of Shell to emerge strongly from the current downturn could help it do well in the long run. For instance, the oil and gas drilling major is preserving its balance sheet health by lowering operational costs, reducing capital investments, planned portfolio restructuring and strategic sale of non-core assets to deliver enhanced free cash flows and innovative projects.

Shell is observed to strategically managing its operating cash flows to sustain a robust balance sheet by not undertaking any new investment project and uniquely distributing its overall cash flows across the maintenance of its current operations while delivering improved shareholder returns.

Optimizing the operations

Shell’s ongoing commitment toward optimizing its operations by enhancing the non-core asset sales to approximately $30 billion over the fiscal years 2016 till 2018 is commendable.
Shell is believed to have significant opportunity to reshape its operational structure with superior grading ‘tail’ assets, advanced infrastructure and mature positions and its continued focus on curtailing long-term options.

In addition, Shell has identified notable options to support its long-term goal including, optimization of upstream and downstream operations, targeting MLP and non-conventional buyers and performing planned divestments from consolidated portfolio. The company is successfully managing dividend through its entire cycle and it is committed to pay $1.88 per share in 2015 and a minimum of $1.88 per share during the fiscal year 2016, supported by the enhanced dividend payment capacity through the consolidation of BG.

Shell is significantly committed towards implementing a refocused portfolio, increasingly attracting the key investors which are further driven by solid returns being offered by the company amid tough international operating environment.

Shell has also provided its operational outlook for third quarter of 2015 and estimates to sustain a divestment impact of approximately 100 kboe per day for its upstream operations. Upstream planned maintenance is estimated to be nearly 33 kboe per day and Netherlands underground storage and gas (NAM) reduction of about 80 kboe per day.

For the downstream operations, the availability of refinery lowered owing to enhanced maintenance activities, nearly 100 kbpd of marketing activities, approximately 60 kbpd of refining capacity and ongoing downtime for growing Moerdijk cracker operations during the third quarter of 2015.


As seen above, Shell’s cost optimization moves look impressive as the company is taking a number of smart steps to counter the weakness in the end market. However, I think that it will be best for investors to remain cautious about the company as its balance sheet is weak with a debt of $53 billion. In comparison, its cash position is weaker, indicating that Shell might face liquidity problems going forward.

So, investors should wait for a turnaround in the oil market before taking a call on Shell.
Published on Oct 3, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...