Is Shell on the Right Path to Achieve Its Cash Flow Priorities?
Shell’s cash flow priorities
Royal Dutch Shell (RDS.A) has laid down clear priorities for the utilization of its cash.
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Shell’s chief priority is to reduce its debt level, which has risen significantly since the BG Group acquisition. However, now it’s falling, which we’ll look at later in the series. Its other priorities are dividend payments, share repurchases, and capital investments.
Shell has steadily paid dividends. It recently canceled its scrip dividend program, moving to full cash dividend payments. To augment shareholder returns, Shell could consider share purchases when the situation is conducive. It plans to buy back shares worth ~$25 billion from 2017–2020, subject to debt reduction and oil price recovery.
To achieve its cash flow priorities, Shell plans to pull four powerful levers: divestments, capital expenditure, operating costs, and new projects. It plans to exit its non-strategic assets or positions, lower its capital spending, reduce its operating costs, and increase its cash flow by delivering new projects on schedule.
For divestments, Shell’s target is to sell assets of $30 billion from 2016–2018. Shell is now close to achieving that target. Of the stated target, $24 billion has been completed, and the remaining $6 billion is either in progress or announced.
For capital spending, the company expected its capex (capital expenditure) to be ~$25 billion in 2017. It incurred $24 billion toward capital investment in 2017, which was well below the stated target. For operating costs, Shell expected its 2017 underlying operating costs to be $40 billion. It was $38 billion in 2017, just below its target.
Shell has delivered new projects on time and within budget.
Shell has successfully deployed its levers to achieve its stated cash flow priorities. Going forward, it plans to continue working on these levers.
Shell achieved $15 billion of organic free cash flow in 2017 at an average oil price of $54 per barrel. If its average oil price level stays at $60 per barrel from 2019–2021, it expects to achieve a free cash flow of $25 billion–$30 billion per year. It also plans to support its target by restructuring its upstream portfolio, profit-maximizing its downstream portfolio, and focusing consistently on achieving synergies from the BG Group integration.
In the next part, we’ll take a look at Shell’s upstream portfolio.