Royal Dutch Shell said it's preparing for a "prolonged downturn" by cutting thousands of jobs and slashing billions of dollars in investments over the next two years. The shares gained the most in more than seven months.
The current downturn in oil prices could last for several years, the company said Thursday, compared with a forecast in April that prices would return to $US90 by 2018. Shell is cutting 6500 jobs this year and plans to reduce capital investment by $US7 billion ($9.6 billion), it said in a statement.
Shell joins rival oil giants BP and Chevron in cutting costs as the world's biggest oil producers grapple with a 50 per cent slump in crude prices in the past year. They are reducing jobs, deferring projects and selling assets to strengthen their balance sheets and maintain dividend payouts.
"Shell is highlighting the lower for longer oil price scenario and setting up their business to deal with that," said Aneek Haq, head of oil and gas at Exane BNP Paribas in London. "They've now gone further than their peers on cost cuts in this scenario."
The company's B shares, the most widely traded, rose 4.7 per cent, the biggest gain since December. The stock has dropped 17 per cent this year.
Challenging times
Crude has slumped to a six-year low as the US produces near the fastest rate in three decades and leading members of OPEC pump at a record pace. Brent entered a bear market this month and traded at $US53.61 a barrel overnight in London, compared with about $US106 a year ago.
"We have to be resilient in a world where oil prices remain low for some time," Shell chief executive Ben Van Beurden said in the statement. "These are challenging times for the industry, and we are responding with urgency and determination."
Shell, which is buying BG Group for more than $US70 billion, also reported a 38 per cent decline in second-quarter adjusted profit.
The BG acquisition, to be completed by early next year, will give Shell deepwater assets in Brazil, consolidate its position in Australia's gas industry and allow greater participation in the US's emerging LNG export industry. Yet oil's slump means LNG rates are also declining because most contracts are linked to the price of oil.
The BG purchase would be boost cash flow at $US67 a barrel in 2016, according to the CEO, who said the deal works even at the current oil price.
Cutting costs
Shell plans to reduce operating costs by $US4 billion this year, before making further cuts in 2016. The Hague-based company employs about 94,000 people in more than 70 countries and territories, according to its website.
"After six months of relative inaction versus industry peers, Shell now looks to be responding to the low oil price environment," said Alastair Syme, oil analyst at Citigroup in London.
Shell said the combined investment by the enlarged group with BG next year would reach $US35 billion, down from the $US40 billion it announced three months ago.
Oil explorers are seeking large discounts from contractors and sending some projects back to the drawing board to find cheaper ways to build them after crude prices crashed.
Chevron this week said it's eliminating 1500 jobs to curb spending by about $US1 billion. ConocoPhillips has said it's continuing layoffs while it, too, strives to slash $US1 billion in spending over two years.
Beating estimates
Job cuts at exploration and production companies have accounted for about 10 per cent of the more than 150,000 layoffs globally throughout the industry, according to Graves & Co., a Houston-based adviser that has closely tracked the cutbacks. That compares with more than 100,000 eliminated from service providers and drilling contractors.
Shell reported second-quarter profit adjusted for one-time items and inventory changes dropped to $US3.8 billion from $US6.1 billion a year earlier, according to a statement on Thursday. That beat the $US3.4 billion average estimate of 16 analysts surveyed by Bloomberg.
Its dividend commitment will remain unchanged at $US1.88 per share this year, with at least that amount paid in 2016.
Bloomberg
