Shell Cuts Spending, Suspends Buyback Plan

Shell has scaled back its capital expenditure plan for 2020 by 20% to $20bn or less, in order to boost its free cash flow, the Anglo-Dutch major said on March 23.

The company's capex came to just under $23bn in 2019. It also said it was targeting a $3-4bn reduction in annual underlying operating costs over the next 12 months, compared with the level in 2019, and would make material cuts to its working capital.

These measures are aimed at generating an extra $8-9bn of free cash flow annually on a pre-tax basis, Shell explained. The company is still committed to its plan to shed $10bn of assets over 2019 and 2020, but cautioned that the timing of the remaining sales would depend on market conditions. It divested $5bn of assets last year.

"As well as protecting our staff and customers in this difficult time, we are also taking immediate steps to ensure the financial strength and resilience of our business," Shell CEO Ben van Beurden said. "The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past."

Shell has also cancelled the next tranche of its share buyback scheme. It said January 30 that the next tranche of the buyback programme would be reduced to $1bn from $2.75bn in each of the previous three quarters.

The oil major reported a 48% yr/yr fall in earnings in the fourth quarter, while its cash flow from operating activities slumped 74%, as a result of lower prices and weaker downstream margins. In its March 23 statement, the company said its liquidity remained strong, with around $20bn in cash and cash equivalents and $10bn of undrawn credit lines. 

 Shell joins BP, Chevron, ExxonMobil and Total and other major oil and gas producers in announcing significant reductions in spending in response to the sudden oil market downturn, caused by Covid-19's impact on demand and the expectation that Russia and Saudi Arabia will ramp up production over the coming months.

Brent is down 4.2% at the time of writing, trading at $25.85/barrel.