EUR 850.00 For Business Accounts Only

Morningstar | Shell Is on Its Way to Hitting Its 2020 Targets

With the restoration of its cash dividend, Shell has demonstrated that it has taken the necessary steps to remain competitive in a world of $60/barrel oil. Like the rest of the integrated group, Shell has reduced its cost base, which had become bloated, in part by reducing headcount and improving its supply chain. Furthermore, the addition of BG’s low-cost production reduces Shell’s per-barrel operating cost, which ranked among the highest in its peer group. Shell already reduced operating cost by 20% from 2014 levels and holds that potential further reductions are possible in later years.At the same time, Shell plans to avoid the mistakes of the past, when rising commodity prices resulted in ever-increasing capital budgets, by keeping yearly capital spending between $25 billion and $30 billion through 2020, a 40% reduction from the nearly $50 billion it spent in 2014. The sharp decrease should improve capital efficiency, but should not completely sacrifice growth. While the reduction in spending is in part a function of canceled marginal projects that are no longer economical, it also results from cost deflation, improved performance, and design standardization, which have meaningfully improved potential returns and reduced total project spend.The impact is most notable in Shell’s future deep-water projects in the Gulf of Mexico and Brazil, where break-even levels have fallen to $45/bbl. The improved economics of deep-water projects--combined with projects nearing completion, high-return conventional reinvestment opportunities, and a large LNG portfolio (which does not decline)--mean it can deliver modest production growth at a reduced level of spending. As a result of its collective efforts, including divestiture of capital-intensive low-return upstream and downstream assets, Shell should boost margins and improve returns by 2020, leaving it in a better competitive position. However, while we think it might not quite achieve its goal of 10% return on capital, we expect it can realize its $25 billion in free cash flow target with oil of $65.