July 20, 2016
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More Spending Cuts at Shell After BG Deal

Royal Dutch Shell has cut its 2016 spending by another 10 percent after completing the $54 billion acquisition of BG Group, warning that low oil prices will continue to weigh.


It's still a giant but Royal Dutch Shell is shrinking again. It's cutting its 2016 spending by another 10 percent to $30 billion, saying low prices continue to hurt.

Simon French, Panmure Gordon Chief Economist, says "We're still trading at $45, which in many geographies, in many projects is just about cash generative. Not really profit generative and therefore even if you just anticipate a bounce from here, a number of projects that have been slated to come on stream in the coming years just simply won't be profitable at these levels."

Shell became the world's top liquefied natural gas producer in February after paying $54 billion for BG Group. The price was agreed before the recent commodities plunge. But first quarter results were still better than expected, despite a 58 percent drop in profits.

Overall oil and gas output was up 16 percent. The new cut is partly the result of pressure from shareholders.

"Their ability to return cash to shareholders despite being barely covered in terms of their earnings being able to justify that. Their dividend payment, has enabled them to weather the storm, through access to capital markets through deferring capital spending, through adding debt to their balance sheet. But this is only sustainable for so long."

Reduced earnings potential longer term is the price Shell may have to pay for the self-help measures now.

Especially if oil prices don't recover.

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