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Oil major Shell sells Canadian Natural Resources stake as debt burden weighs

Highlights


Further reduces oil sands involvement

Shell debt ratio one of highest among majors

Further debt reduction planned to 2020

London — Shell is to sell its roughly 8% stake in Canadian Natural Resources for $3.3 billion, it said Tuesday, putting it on target in a divestment drive intended to cut one of the highest debt levels among the major producers.

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Shell said in a statement it was selling 97,560,975 shares under an underwriting agreement with major banks and the proceeds would contribute to reducing net debt.

It continues Shell's divestment from oil sands operations in western Canada, which account for more than 40% of CNR's hydrocarbon output and include the Horizon and Athabasca Oil Sands projects.

Shell had obtained the holding as part of a $7.25 billion deal last year in which it handed over its 60% direct stake in the Athabasca project and other assets to CNR.



The majors generally have been exiting Canadian oil sands since oil prices collapsed in 2014, reflecting the high costs and specialized nature of such operations. Corporate results from CNR last week underlined the steep discount producers are having to accept for such oil as a result of pipeline bottlenecks.

Shares in CNR, which also has some North Sea production, dropped several percentage points in early trade after the announcement.

The sale puts Shell on track for early completion of its goal of $30 billion of divestment in 2016-18; it had completed $26 billion by March 31.

It has since set a new goal of more than $5 billion of asset sales in both 2019 and 2020 as it targets a gearing ratio of under 20% by the end of 2020, down from 24.7% at the end of the first quarter this year.

Shell's debt ratio shot up with its $54 billion purchase of BG in February 2016, from being one of the lowest among the majors, with gearing of 14% before the deal.

Some in the industry, including Total, which is among the least indebted majors, have noted increases in the cost of debt on the back of US interest rate rises, even as hedging helps cushion the effect.

Just over two years since it bought BG, Shell's conventional upstream oil production is not much changed. It was up 2% in the first quarter of 2018 compared with the fourth quarter 2015, the last quarter before the deal.

That is because the Brazilian production it gained is still expanding, and it has lost output in the Middle East and North Sea.

But it has sharply increased output of conventional gas, and output of both gas and liquids from its 'integrated gas' unit, which is focused on LNG-related activity and is counted separately from the conventional upstream. The increased 'integrated gas' output mainly reflects expansion of the Chevron-operated Gorgon project in Australia.

Shell's debt reduction was hampered in the first quarter by tighter refining margins, which led to cash flow from operations being largely unchanged from a year earlier, despite 25% higher oil prices. Its return on average capital employed in the first quarter this year was a meager 6%.

--Nick Coleman, nick.coleman@spglobal.com
--Edited by Jonathan Loades-Carter, newsdesk@spglobal.com