Shell Will Emerge Stronger from Restructuring: CEO

Anglo-Dutch major Shell is working on its new business strategy which it will announce next February, but for now CEO Ben van Beurden is convinced it will emerge leaner and more profitable as it adjusts to a lower-price, lower-carbon energy market. Protecting value and preserving its AA credit rating are two main objectives, he told journalists July 30, promising that Shell would be "fitter than ever."

He said the company had world class assets, the highest value barrels – he singled out Gulf of Mexico and deepwater Brazil, but also hinted strongly that its UK West of Shetland oil assets would not be sold– and disciplined execution, as it reported dire second-quarter results. 

As it cuts the dividend, writes down assets and profits languish, investors need a reason to stick with the company. But he said that Shell's assets and people are world-class, and the company still represented a great investment opportunity. But it will have to balance more finely the competing claims of dividends, the balance sheet strength and capital expenditure.

Cost savings have been at the top of the agenda: out of the 77 exploration wells that Shell had planned for this year, only 22 will be drilled. Its annual capital expenditure will fall by a third, from around $30bn to $20bn. Flexibility of operations will be key: in the low price environment it was able to leave a lot of oil in the ground for better days. So far another big cost, staffing numbers, has been managed on a voluntary basis.

As evidence of the inherent strength, he said the company's cash flow had been the best of its peer group for the last three years. The company's problems, by contrast, were external and shared by its peer group rather than Shell's alone.

Forced to take a new approach to almost all its operations earlier this year, it has used digitalisation and virtual reality much more. It has also begun work on a complete redesign of operations management: this includes how it does feasibility studies, research and development and carries out its maintenance. The company picked on its US shales business as its first pilot scheme as that was struggling the most and the results have been encouraging. Without putting dollar figures on it, he said that savings of 40% were possible next year.

The consequences of the Covid-19 pandemic will last for an unknowable period and will have profound effects on society's future energy needs, he said. But the crisis has also inflated volatility, a key way to make or lose  money. By quickly reconfiguring a Dutch refinery to produce less jet-fuel as lockdowns took hold and to sell other products instead into undersupplied markets, the trading team contributed to perhaps the strongest quarter ever.

The company also stood by its purchase of BG, but for which cashflow, dividends and buybacks would all have been much lower over the past four years, even if certain assets – notably BG's Australian coalseam gas to LNG projects – were too costly, by today's standards. 

Shell's offshore Australian LNG project, Prelude, the pioneering floating plant in the Timor Sea, was however its own invention and it has suffered from numerous operational setbacks. Shell does not report at an asset level, but dealing with the pioneering technology must have consumed the company's managerial, intellectual and financial resources, and acted as a brake on earnings as well.

But given global population growth, greater wealth and the shift towards a low-carbon economy, the company still placed a lot of value on LNG, despite the impairments, said CFO Jessica Uhl.