Shell, Total cut spending, share buybacks in response to oil price slump

European oil majors Shell and Total announced Monday plans to cut capital expenditure by around 20% and suspend their share buybacks as part of a raft of measures to strengthen balance sheets in response to collapsing oil prices and the economic impact of the global coronavirus pandemic.

Shell said it would cut its cash spending by $5 billion from planned levels to $20 billion "or below" in 2020 and reduce its operating costs over the next 12 months from 2019 levels. Separately, Total announced a "$30/b action plan," under which it will cut more than $3 billion, or over 20%, mostly from its organic capex this year, taking its net investments to less than $15 billion.

"The combination of steeply falling oil demand and rapidly increasing supply may be unique," Shell CEO Ben van Beurden said in a statement to the London Stock Exchange. "But Shell has weathered market volatility many times in the past."

The oil major said the measures, which include reducing underlying operating costs by up to $4 billion, would together contribute up to $9 billion to its free cash flow over the year.

Total said it also planned to trim a further $500 million from operating costs this year compared with 2019, instead of the $300 million previously announced. It said its capex cuts would come mainly in the form of short-cycle, flexible spending, "which can be arbitrated contractually over a very short time period."

BALANCE SHEET PAIN

Shell and Total's spending announcements follow similar moves by BP and Eni. The Italian major became the first European major to bow to the oil-price rout by flagging heavy spending cuts last week. BP has said it has the flexibility to cut spending by 20% this year from its $15.3-billion capex last year but it has yet to revise its guidance.

Oil prices have more than halved since the start of the year to below $30/b caused by the economic impact of coronavirus around the world and the breakdown of the OPEC+ deal. Cash flow break-evens for European majors average around $50/b, however, and analysts have predicted a wave of heavy spending and dividend cuts to balance books as revenues collapse. Brent crude was trading around $26/b in midday European trade Monday.

Equinor on Monday joined its oil major peers by suspending share buybacks but gave no new capex guidance.

Global oil demand could fall by over 12 million b/d on the year in April and May and result in an annualized fall of as much as 3.2 million b/d in 2020, the head ofS&P Global Platts Analytics Chris Midgley has warned.

In January, van Beurden had said the average breakeven oil price for projects approved by Shell for development last year was under $30/b.

International oil companies are being forced to review upstream investment commitments in response to the crisis, but Shell made no reference Monday to its previous pledge to maintain upstream investment at around $11 billion-$13 billion a year.

Shell said it remained committed to its divestment program of more than $10 billion of assets in 2019-20 but said the timing would depend on market conditions. It said it also continued to ensure it has a robust balance sheet to manage volatility, with around $20 billion in cash and cash equivalents, and $10 billion of undrawn credit lines.

EMEA oil, gas company spending reactions to price rout

(Adds statement from Total, detail, table of EMEA spending cuts)