Under the stewardship of new Chief Executive Ben van Beurden, Shell appears set to follow in the footsteps of other UK players BP and BG Group and prioritise value over the high volume, capital-intensive projects that have long been the company’s calling card.
Addressing journalists at the company’s full-year 2013 results presentation, van Beurden spoke of a need to achieve better capital efficiency while improving operational performance and project delivery.
However, van Beurden refuted suggestions the strategic rethink was merely a case of "kitchen sinking it”, [getting bad news out while the new CEO beds in] and insisted the crux of Shell’s presentation would have been the same were former Chief Executive Peter Voser still at the helm.
"Our overall strategy remains robust, but 2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance,” said van Beurden.
Despite not openly criticising his predecessor, van Beurden suggested Voser’s focus on building the company’s gas portfolio had perhaps gone too far, and pointed to the recent sale of US shale assets as proof Shell is prepared to trim its unconventionals position where necessary.
"In integrated gas, we have a very rich funnel of development opportunities – maybe a little too much,” said van Beurden, who conceded later that Shell had bought into the US gas sector "a bit too hard, too soon”.
Van Beurden indicated he would be careful not to make the same mistake again, especially in politically unstable environments such as Iraq, Kazakhstan and Nigeria.
"Frankly, I believe we got a little ahead of ourselves in some of these long-term plays and I want to moderate our investment pace here,” he said.
"Running through all of this, I want to make sure that we apply rigorous capital discipline – this means investing in the projects that generate the best returns and cashflows and getting out of plays where we can’t add value for our shareholders.” Shell’s capital expenditure is projected to fall by 20% in 2014 to $37 billion, while underlying organic capex is set to fall by 8% to $35 billion. Divestments, meanwhile, will amount to $15 billion in 2014 and 2015 combined.
Stable spending
Pressed by Interfax on Shell’s longer term spending plans, Chief Financial Officer Simon Henry refused to provide further numbers, but said it was "unlikely” capex would be as low as $25 billion, and that spending would probably remain stable at around 2014 levels.
"That level of capital is what we have already chosen as being a level that will provide some growth, so to stay within that – that’s our overall strategic intent,” said Henry.
In terms of refocusing Shell’s portfolio towards higher value projects, Henry pointed to the company’s recent loss of volumes in Abu Dhabi (when a 75-year concession agreement came to an end earlier this month), an outcome which, though far from ideal, allows the company to showcase its new strategic mindset.
"I don’t make light of losing 150,000 barrels of oil equivalent per day, but I’d rather have one well in the Gulf of Mexico for value terms. A good well in the Gulf of Mexico could be a lot less volume but potentially a lot more value, and that’s the mindset we must have,” said Henry.
From a results perspective, much of Shell’s Q4 troubles were already known, the company having released a profit warning on 17 January which put net income for the final quarter of the year approximately 30% below City consensus. Fourth quarter earnings on a current cost of supplies basis stood at $2.15 billion, down by 71% from the same period in 2012.
In terms of gas sales, Shell said equity LNG sales volumes were 10% lower in the fourth quarter compared with a year ago, at 4.93 mt. Full year equity volumes were 3% lower at 19.64 mt.
The full-year drop was entirely to the result of problems in Nigeria, Shell said. The Nigerian LNG project was interrupted at various points during the year because of vandalism and sabotage affecting the feedgas supply to the plant.
Still a ‘hold’
US investment firm Bernstein appeared undaunted by van Beurden’s talk of change, describing the company’s strategy as boasting "the right end-game”.
However, Bernstein retained its ‘hold’ recommendation on the company, pointing to an already weak outlook for Q1 2014, driven by low downstream availability and high margin barrel maintenance.
"We would await a better entry point. We prefer other names such as Statoil, Eni, and Total which are less downstream/North America exposed and also following the new Majors path,” said Bernstein.
Neil Morton, oil and gas analyst at Investec, seemed slightly less convinced by van Beurden’s debut results presentation, describing the Dutchman’s comments on changing emphasis and improving returns as "a holding statement”.
However, Morton conceded that van Beurden’s message was "pretty much what we believe the market wanted to hear”.
(interfaxenergy.com, 30 Jan., 2014)
