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

Highlights

Companies to cut capex by around 20% in 2020

Shell eyes $8-9 billion cash flow boost from measures

Total to target short-cycle capex spending

London — 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.

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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

Company 2020 action Detail
BP Flexibility' to cut 20% from 2019 capex of $15.3 billion Cuts likely focussed on US shale
Shell 20% capex cut to $20 bil or below. Up to $4 bil of opex cuts over 12 months. N/A
Total 20% organic capex cut to less than $15 billion. $500 mil of extra opex cuts Focussed on 'short-cycle, flexible' capex
Eni Considering 'strong' reduction in capex, opex To provide details at Q1 results on April 24
Saudi Aramco Capex guidance cut 25-29% to $25-30 bil Optimized' spending to boost oil, gas production
Sonatrach To halve capex to $7 billion N/A
Tullow 30% capex cut to $350 million. 45% reduction in exploration budget Production target confirmed at 70,000 – 80,000 boe/d
DNO 30% capex cut or $300 million Suspending discretionary drilling and projects outside Kurdistan
Wintershall 20% cut in planned capex to 2019 levels of $1.3 bil Targetting 600,000-630,000 boe/d 2020 production excluding onshore Libyan volumes
Aker BP 20% capex cut compared to previous guidance of $1.5 bil Near-term output unchanged, but new projects/exploration deferred
Premier Oil Targetting $100 mil in cost savings N/A

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

European oil majors Shell and Total Monday announced 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.

Body

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."

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.