Shell (RDS.A) Considering $40 Billion Non-Core Asset Sale

Integrated energy major, Royal Dutch Shell (LON:RDSa) plc RDS.A is contemplating the sale of non-core assets worth $40 billion via a stock exchange listing in order to strengthen its cash position to repay debts and meet future investment commitments.

In Feb 2016, Shell closed a $50 billion merger with BG Group (LON:BG) plc − a leading upstream energy player in the UK. The transaction was completed just weeks after a massive decline in oil prices to a 13-year low of nearly $27 a barrel. Post the merger, the company’s long-term debt burden increased to the current level of around $73 billion, while its liquidity declined.

Meanwhile, management is 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 newly formed entity, referred to as “Baby Shell”, will likely 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.

Notably, in 2014, Shell raised $920 million by spinning off a pipeline of U.S. assets, Shell Midstream Partners L.P. (NYSE:SHLX) , in the most successful master limited partnership (MLP) IPO in a decade. Hence, the company is not unfamiliar with the complications involved in the execution of such a plan.

In order to mitigate financial weakness from the acquisition, Shell has been reducing its headcount in an effort to lower capital expenditure and maintain incremental dividend payouts, going ahead. Last year, the firm slashed around 10,000 jobs to reduce costs and improve competitiveness. This year, the company intends to cut another 2800 jobs in an attempt to reap benefits from the merger and realize pre-tax synergies of around $3.5 billion.

Headquartered in The Hague in the Netherlands, Shell is one of the largest integrated oil and gas companies in the world. It explores for and extracts crude oil, natural gas and natural gas liquids. It has interests in chemicals as well as in power generation and renewable energy.

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

A couple of better-ranked players in the energy sector are McDermott International Inc. (NYSE:MDR) and Braskem S.A. (NYSE:BAK) . Both these stocks sport a Zacks Rank #1 (Strong Buy).