Shell is finally hunkering down for cheap oil. The Anglo-Dutch major has underperformed peers this year on the stock market, in part because the $70 billion takeover of BG, announced in April, seemed to need more expensive crude to work. Shell is now responding to an oil downturn which it says may last for several years.
When Shell managers explained the logic behind acquiring BG, they worked with an oil price assumption of $90 a barrel in 2018. The price of Brent has been below that since October 2014. Shell is now responding. It plans to cut costs this year by $4 billion, or 10 per cent, and has promised more for 2016. It has slashed 2015 capital spending by another $3 billion, so there will be a 20 per cent drop from last year.
The initiatives are needed, as the cash from operations in the second quarter did not cover dividends and capex. The planned savings cover three-quarters of the annual dividend, Bernstein analysts reckon. After asset sales, the ratio of net debt to equity-plus-debt is just 12.7 per cent, a slightly lower ratio than a year ago.
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The $1.88 per share annual dividend looks safe, especially as some holders take shares rather than cash. With that income security, the 6.8 per cent dividend yield looks too high. That yield is falling. Shell's shares rose nearly four per cent in morning trading on Thursday.
BG shares could be a good way to gain from Shell's more realistic attitude. After adjusting for expected dividends, they trade at around an eight per cent discount to the implied value of Shell's cash-and-shares offer. Barring a much deeper downturn in oil, the deal should close in early 2016. Shell's latest self-help initiatives may go some way towards convincing sceptics of the merits of the deal.
