Shell is working to cut down its capital expenditure, operating costs and postponing the next phase of its share buyback to enable it save $10bn in the face of the Covid-19 pandemic.
The oil giant targets to cut underlying operating costs by $3bn – $4bn a year over the next 12 months compared to 2019 levels and reduce cash capital expenditure to $20bn or below for 2020 from a planned level of around $25bn.
It also hinted that shelving the company’s share buyback would save another $1bn.
The oil giant in a statement said, “Together, these initiatives are expected to contribute $8bn – $9bn of free cash flow on a pre-tax basis. Shell is still committed to its divestment programme of more than $10bn of assets in 2019-20 but timing depends on market conditions.”
Chief executive Ben van Beurden said he was “taking immediate steps to ensure the financial strength and resilience of our business”. Covid-19 has led to a slump in the demand for oil, particularly in the aviation industry exacerbated by the oil price war between Saudi Arabia and Russia.
“The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past.”
Brent crude was trading almost 5% lower at less than $26 a barrel on Monday. Shell launched a $25bn share buyback to offset dilution from shares issued during the 2016 takeover of BG Group as well as shares issued as dividend payments after the last oil price crash of 2014 -16.
Hargreaves Lansdown analyst Nicholas Hyett said the company could come under pressure to put aside its “totemic dividend policy”.
“However some shareholder returns have already proven less than sacrosanct, with the share buyback suspended. If we’re in a new era of sustained sub-$40 oil then the dividend could yet become a burden that’s too much to bear,” he said.
“That’s the rub for Shell investors. The group’s taking emergency action to protect cash flow in the short term, but the influence of the oil price means its future is largely out of its hands. There’s no knowing exactly how long the toxic combination of increased global supply and falling demand will last.”
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