Royal Dutch Shell (RDS.A) Unveils New Plans, Eyes No. 1 Spot

Europe’s largest energy producer Royal Dutch Shell (LON:RDSa) plc RDS.A reiterated plans to further cut costs and confirmed that the 3-year $30 billion asset sale program was well on track. In its new mid-term strategy, the company announced several steps to cope with the ‘lower for longer oil’ and pay down its ballooning debt following the $54 billion BG Group acquisition.

According to Shell management, these policies will help reassure investors about the company’s ability to cover the all-important dividend payment. This has assumed significance after Shell had to dig into reserves for shareholder payouts during the first quarter when cash flow fell below the dividend bill.

The group’s Chief Executive hopes the new strategy will lift stock price, improve shareholder returns to about 10% by the end of the decade and eventually catapult Shell to its glory days by making it the best oil investment ahead of Exxon Mobil Corp. (NYSE:XOM) .

Let’s look at the details of Shell’s first strategy presentation since the BG deal closure in Feb:

Asset Sales Plan on Target

Shell has been slow to progress on its promised $30 billion asset disposal plan by 2018 but said that it is likely to take big steps this year – getting rid of $6-$8 billion worth of non-core properties. The supermajor badly needs the sale proceeds to control its spiraling debt burden that jumped to 26% of its capitalization as of Mar 31, from 14% at 2015 year-end.

Lowers Capex…Again

The Anglo-Dutch group vowed to limit its spending for 2016 within $29 billion, implying a cut from the previous estimate of $30 billion, which itself was lower than an earlier projection of $33 billion. For the period up to 2020, Shell has capped its capital expenditure within a range of $25 billion and $30 billion.

Streamline Global Operations

The company on Tuesday also unearthed plans to trim its global activity by ending oil and gas operations in five to 10 countries and offloading 10% of its producing properties. While keeping mum on the countries it might exit, Shell made it clear that it wants to focus on 13 nations, which would include Brazil, Australia and the U.S.

Confirms Job Cuts

The Hague, Netherlands-based group confirmed another 2,200 job cuts as fallout of the BG deal, in addition to the 2,800 announced previously. In fact, Shell has announced global headcount reduction in excess of 10,000 globally over the last two years.

However, rubbishing reports of the BG buy as ‘costly,’ CEO Ben van Beurden raised its target for savings from the acquisition by $1 billion to $4.5 billion by 2018.

No ‘Baby Shell’

Meanwhile, management declined reports that it was planning an initial public offering (IPO) of the company’s mature assets in order to benefit from a sustained oil price recovery and refocus on core assets. The new entity, referred to as 'Baby Shell,' was rumored to consist of upstream assets in the UK, Norway, New Zealand, Italy and Nigeria. Also, the confirmation of an IPO is expected within the next 12 months.

Zacks Rank & Key Picks

Royal Dutch Shell currently carries a Zacks Rank #3 (Hold), implying that it will perform in line with the broader U.S. equity market over the next one to three months.

Some better-ranked players in the energy sector are McDermott International Inc. (NYSE:MDR) and North Atlantic Drilling Ltd. (NYSE:NADL) . Both stocks sport a Zacks Rank #1 (Strong Buy).