Why Royal Dutch Shell Is a Good Bet

Royal Dutch Shell (RDS.A) (RDS.B) targets on further selling consolidated non-core assets of Shell and BG worth $30 billion during the fiscal years 2016 through 2018. In addition, Shell is keen on delivering innovative growth projects and sustaining significant cash flows by minimizing operating expenditures by nearly 10% or $4 billion in 2015 and cutting about 7,500 jobs during the year. Shell is also reducing capital investments by approximately 20% or $30 billion in 2015 and targets on lowering 2016 capital investments in both Shell and BG.

Lowering costs

Shell expects to lower the fiscal year 2015 operating costs by 10% compared to 2014 and achieve a competitive operating cost performance over the years.
The capital investments have also been reduced over the past few years and in line with Shell’s continued commitment to deliver improved shareholder returns and profitability while gradually focusing on increasing the capital investments for fiscal year 2016.

The significant growth prospects of Shell coupled with the company’s cost minimization strategy has enabled it to sustain notable, much-needed cash flows and encouraged the key investors to provide an investment grade credit rating to the company.

For Downstream operations, the company earnings gained from steps employed by Shell to enhance financial performance and from improved recognized refining margins. The upstream earnings of Shell were poorly effected by weaker oil and gas prices, somewhat offset by weaker costs, enhanced production volumes and better operational performance.

The oil and gas mining company reported continued decline in both its top and bottom lines primarily driven by the ongoing weaker global commodity demand and pricing environment, hurting the company’s key margins. Still, Shell is focused on delivering improved shareholder returns as per its commitment.

Shell is strategically maintaining a healthy cash position by minimizing the non-core expenditures while generating sustainable and satisfactory cash flows to deliver impressive dividends even in a tough global operating and commodity pricing environment.

Unfavorable end market

The current oil price outlook is still not favorable with planned OPEC policy alteration and non-OPEC expansion. The medium-term supply or demand basics still remain optimistic and the company is reacting with determination and urgency. Shell is uniquely lowering the upstream capital expenditures and it is depicting resiliency in current oil prices while strategically addressing the company’s cost structure.

Shell seems to be impressively managing the rising cost structure amid tough global commodity demand and pricing environment by managing the non-core upstream and downstream capital expenditures.

Shell is expected to benefit remarkably through the acquisition of BG. It expects this transaction to create total synergy of $2.5 billion to $3.5 billion in 2018. This represents an increase of 40% from its earlier estimated synergy through this acquisition. This increase is attributable to a doubling of expected operating cost savings from $1 billion to $2 billion and underscores the attractiveness of the recommended combination for both sets of shareholders. The chart below better illustrates the combined synergy from Shell and BG.

Conclusion

Royal Dutch Shell is one of the best investments in the oil segment. The company is taking aggressive steps to mitigate the soft commodity price environment. It has drastically reduced its operating as well as capital costs. Also, it is engaged in optimization of assets and selling of non-core assets that do not fit into this downturn.
Published on Jan 22, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...