Shell has sought to reassure shareholders about its blockbuster takeover of BG Group by announcing an extra $1bn (£650m) of cost savings aimed at making the $70bn deal work in the face of persistently low oil prices.
The Anglo-Dutch oil group said on Tuesday that a doubling of cost cuts to $2bn would increase total savings from the takeover by 40% to $3.5bn. Shell said it was on track to complete the acquisition by early next year as planned.
Investors have been nervous about Shell’s purchase of BG since it was announced in April. At the time, Shell suggested oil prices would recover to $90 a barrel by 2020. However, they have fallen from $115 a barrel last year to less than $50 and are predicted to stay low for some time. The International Energy Agency said in July that prices could decline further due to a growing glut of crude and slowing demand.
Shell reported a quarterly loss of $7.4bn last week as it unveiled $8bn of charges to cover its withdrawal from the Alaskan Arctic, the suspension of building on the Carmon Creek oil sands project in Canada and the impact of the depressed oil price.
Shell said the BG deal would break even with oil in the mid-$60s per barrel and that while price forecasts had fallen by $10-$15 a barrel, its calculations of the benefits from the takeover were unchanged. Shell believes buying BG will increase its cash flow, allowing the company to pay off debts and giving it greater scope to pay dividends and buy back shares.
The BG purchase will also let Shell simplify its business by concentrating on oil production and refining, deep water drilling and liquefied natural gas, it said. The company is selling $20bn of assets with a further $30bn planned for the two years after the takeover is confirmed.
Shell’s chief executive, Ben van Beurden, said: “Low oil prices are driving significant changes in our industry. We are reshaping the company and this will accelerate once this [BG] transaction is complete.
“Asset sales and hard choices on capital spending, such as the recent announcements to cease exploration in Alaska and the development of Carmon Creek heavy oil in Canada, all underline the changes that are under way. Integration planning for Shell and BG is progressing according to plan and we’re announcing a 40% increase in synergies expected from the recommended combination.”
This article was written by Sean Farrell, for theguardian.com on Tuesday 3rd November 2015 12.43 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010