Shell axes 6500 jobs, slashes 2015 capex by $3B, as oil prices bite

In the Netherlands, Royal Dutch Shell announced 6500 job cuts and slashed 2015 capex by $3 billion from the April forecast and $7 billion from 2014, as it reported Q2 earnings of  $3.4 billion compared with $5.1 billion for the same quarter a year ago. The company said “Compared with the second quarter 2014, earnings excluding identified items benefited from strong Downstream results reflecting steps taken by the company to improve financial performance and higher realised refining margins. In Upstream, earnings were impacted by the significant decline in oil and gas prices and decreased production volumes, partly offset by lower costs and depreciation.”

With major advanced bioeconomy capex investments from Shell not expected prior to 2018-2019, it does not appear obvious at this time that the capex and job cuts just announced will deeply affect timelines or outcomes.

We looked at Shell’s landmark advanced biofuels investment program here.

Cash flow from operating activities for the second quarter 2015 was $6.1 billion, compared with $8.6 billion for the same quarter last year. Excluding working capital movements, cash flow from operating activities for the second quarter 2015 was $7.6 billion, compared with $11.0 billion for the second quarter 2014.

CEO Ben Van Beurden said

“We’re taking a prudent approach. We’re pulling on powerful financial levers to manage through this downturn, and Simon will give you more details in a moment. Capital spending is expected to be $7 billion lower this year, a reduction of some 20%, and operating costs are expected to be $4 billion lower, or around 10%, as we restructure the company and take out cost. This will include reductions of 6,500 from Shell staff and direct contractors this year. All of this is in place to ensure that we have the capacity to continue to pay attractive dividends for shareholders. Costs and spending should fall again in 2016. At the same time, we are making good progress with the combination with BG, which should enhance our free cash flow, create one of the LNG and deep water leaders – in the IOCs – and be a springboard to change Shell into a simpler and more profitable company. Essentially -‘grow then simplify’. 

The oil price downturn that began in late 2014 is triggering significant changes in our industry. Today’s oil price downturn could last for several years, we don’t have a crystal ball here. Shell’s planning assumptions reflect today’s market realities. We are planning on a prolonged downturn, although we continue to believe the fundamentals will re-assert themselves in the medium-term. Shell is responding with urgency and determination. We’re pulling on powerful financial levers to manage through this downturn, and this is all about making sure that we can continue to pay attractive dividends for shareholders, and maintain a sensible investment program for the medium term.”

Van Beurden added, specifically on downstream where biofuels investments generally reside:

“Let me give you more details on these restructuring themes. Firstly on Downstream. We’ve been busy here with portfolio restructuring and self-help programs. The changes we have made in Downstream have unlocked substantial new revenue opportunities, and taken out costs. It is good to see Downstream return on average capital employed, excluding identified items, increasing to 15.6%, and CFFO was $13 billion over the last 12 months, which is an improvement on 2014 levels. 

“The main drivers of that, in addition to industry margins, were self-help, and exits from low margin portfolios. It’s worth noting that in the first half of 2015, when refining margins have been strong, we delivered a strong operating performance, we had the kit running well, refining unplanned downtime was 2.4%, and availability was 95%. A multi-year cost and improvement program is underway in Downstream. This includes staff reduction, increasing the use of low-cost shared service centers for back-office activities, and a continued drive to improve global contract management for capital and operating spending. Overall, this is an improved position, but there is more to come here, in a multi-year turnaround strategy for Downstream, which has the potential to be a $10 billion per year CFFO, 10-12% return on average capital employed business, on a sustained basis, not just for a few quarters. 

The anonymously-posted website points to a scramble of activity behind the corporate curtain, though the veracity of anonymous postings has to be in question. The site posted that : “Also this 6500 number doesn’t count the contractors and BG employees. Almost all of BG employees, even senior management expect to be let go. We have seen a drastic decrease in contractor pay and termination of contracts in order to save displaced staff jobs.”

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