LNG deal ushers in tighter Shell spending regime

Thu Jan 2, 2014 4:02pm GMT

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Quotes

   

* Outgoing CEO Voser to work in Switzerland on full pay

* Deal accounting flatters spending for new boss's first year

* New CEO faces Q4 results Jan 30, investor day March 13

* Shell has $55 bln to spend in next 2 years under plan

By Andrew Callus

LONDON, Jan 2 (Reuters) - Royal Dutch Shell's new boss Ben van Beurden will be able to point to a clear downward trend in spending this year, thanks in part to the way the oil company is accounting for an acquisition completed this week.

In a deal announced on Thursday just 24 hours after the former head of refining and marketing took over officially as chief executive, Shell completed the acquisition of liquefied natural gas (LNG) assets from Spain's Repsol.

Shell will burden its 2013 accounts with most of the cost, helping van Buerden commit to significantly lower spending from this year - something Shell's shareholders are very keen to see happen given that any budget strains can only dim the outlook for dividends.

Shell and its peers in the industry are facing increasing investor pressure to keep a lid on spending as costs rise and prospects for oil prices wane.

Shell said it would pay a net $3.8 billion to buy Repsol's LNG portfolio outside North America and take on $1.6 billion of associated debt.

The debt, which does not count as investment spending, becomes part of the balance sheet in 2014, and some $400 million of the actual payment will count as spending this year. The bulk of the transaction cost - some $3.4 billion - is being loaded onto the 2013 spending budget.

Shell had originally planned to complete the deal in 2013, and in its Oct. 30 third-quarter results conference with analysts, finance director Simon Henry forecast net investment spending for the whole year - including the Repsol transaction - of some $45 billion.

That was up from guidance of $40 billion given in the second quarter as a result of the timings of some other acquisitions and divestments.

Shell has pledged a four-year net investment spend of $130 billion for 2012 to 2015, based on a $100 oil price scenario.

Including $30 billion spent in 2012, if 2013 spending now comes in on track, the company will have eaten through $75 billion in the first two years - leaving only $55 billion to spend in 2014 and 2015.

Henry flagged in October that 2013 would be "a clear peak year" for net investments, with divestments stepping up "significantly" in 2014 and 2015.

Since van Beurden began working alongside outgoing boss Peter Voser at the beginning of the fourth quarter, the company has cancelled plans to build a gas-to-liquids (GTL) plant in the United States.

Industry sources have said its Arrow coal bed methane LNG export project in Queensland is another likely casualty of a tighter spending regime.

And bankers are speculating that Shell's 23.1 percent stake in Australian group Woodside Petroleum - worth over $6 billion at current prices - will be among the divestments that Henry flagged.

A Shell spokeswoman said the accounting had been split because a part of the transaction was done in the 2013 calendar year, and it "involved a number of legal entities in various locations and hence requires several steps to complete."

ORGANIC FOCUS

Projects like Arrow and the GTL plant are considered as "organic" spending - unlike the Repsol acquisition and any divestment of Woodside.

And looking behind the headline figures, analysts say it is organic spending that investors are most concerned about, since these are the areas where cost inflation, project delays and other factors can blow strategy off course.

Shell has no four-year target for organic spending, but Henry estimated 2013 organic spending at $36 billion. He said this part of the total was "not going to go down rapidly because that would be the best way to destroy value in our portfolio."

Van Beurden will face investors on Jan. 30 as the company reports fourth-quarter results, and on March 13 at a planned investor day.

In a separate announcement on Thursday, Shell revealed that Voser, who surprised investors last year with news of his early retirement, will be repatriated to his native Switzerland, where he will work for the local subsidiary on his full group chief executive pay and with a full pro-rata bonus.

Voser's retirement was announced on May 2, when Shell said he would step down "in the first half".

Van Beurden's appointment came on July 9 - at which point it was announced that the Dutchman would take over on Jan. 1 and that Voser would leave the company at the end of March.

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