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We haven’t even had time to fully digest the significance of the news of Ben van Beurden assuming the role of CEO at Royal Dutch Shell (LSE:RDSA); (LSE:RDSB) and we are already hearing that RDS intends to divest $15 billion in assets, beginning immediately and continuing through 2015. Investor response thus far has been restrained, with both Class A and B shares down a mere 0.7%. The share price of RDSA closed today at 2,174, whilst RDSB shares closed at 2,287.
The word on the street is that van Beurden intends to make RDS a much more investor-friendly company and that he will do so with a three-pronged strategy, focused on “capital discipline, better returns and selling peripheral assets.” There is even speculation that the total divested over the next two years could exceed $30 billion. News of a planned divestment program actually began in October 2013, but it looks like Shell is ready to shift things into high gear.
Hitting closest to home is the probability that RDS may sell off large portions of their investments in the North Sea. An analyst at Santander noted that, “In the North Sea, something like 80 percent of its production comes from 20 percent of its asset base so there’s a long tail of smaller positions.”
There have been signs of investor unrest with the lavish capital expenditures the company has been making, especially since it overspent its 2013 budget by 12.5%, which also happens to be $5 billion. No doubt the spending is necessary to drive long-term growth, but investors are typically more interest in shorter term grow than the corporate entity is. That may have something to do with the awareness, especially with a company the size of RDS, that the company is going to outlive the investor.
The underlying lying concern for any investor is not the return on the investment. It is being able to trust that the investment is managed wisely and in a manner that sustains the company whilst generating reasonable earnings that are shared with the investors. Van Beurden appears to understand the matter quite clearly.
The North Sea is not the only geographic area where the cutbacks are likely to occur. Shell is losing its shirt with its investments in its U.S. shale operations. JP Morgan has said that Shell divesting its interest in Australia’s Woodside operations is a no-brainer. Add to the list of certainties, its assets in Nigeria. There is almost always some amount of danger in oil and gas investment, exploration and production, but there is no point adding the problems that plague so many sub-Saharan operations.
In balance, and from the 10,000 meter altitude, Shell’s divestment program appears to be part of a correct strategy. Whilst singular dispositions may cause a mild degree of angst, over the long haul, the company should be in a far better position at the end of 2015. Barlcays Capital has named Shell as its top pick in the oil & gas sector, noting that “It is easy to forget that Shell still starts from a stronger free cash flow position that the majority of the peer group.”
