Shell plans investments of $12 billion/year for 2 years

Jan. 7, 2002
Royal Dutch/Shell Group has set a 3-year strategy to maintain profits at 15%/year, invest $12 billion/year for 2 years, cut costs by $500 million/year, and sell $7 billion of under-performing assets if necessary.

Royal Dutch/Shell Group has set a 3-year strategy to maintain profits at 15%/year, invest $12 billion/year for 2 years, cut costs by $500 million/year, and sell $7 billion of under-performing assets if necessary.

The company said its exploration and production division would provide the main thrust of its activities with substantial developments in Nigeria and China. Royal Dutch/Shell also said it is considering making acquisitions during the industry downturn.

Phillip Watts, chairman of Shell´s committee of managing directors, told London financial analysts last month that the group is well positioned to deliver good returns even in a continuing recession because of its strong balance sheet, balanced set of businesses, and low-cost structure.

These circumstances will allow continued disciplined investment throughout the business cycle, he said.

He said that all targets set in 1998, including $5 billion cost improvements and 14% return on average capital employed (ROACE), are expected to be exceeded in 2001.

Reference conditions, the baseline for tracking performance, remain conservative. The main changes are lower marketing margins and a higher long-term Brent oil price assumption of $16/bbl compared with an earlier price assumption of $14/bbl.

Established businesses are expected to be capable of delivering 15% ROACE at reference conditions. For the next 2 years, E&P is expected to deliver around 18%.

Acquisitions

Regarding acquisitions, Watts said Royal Dutch/Shell was looking for deals "which add real value and have a real strategic fit. We have cash, but it isn´t burning a hole in our pockets."

He also said that priority is being given to returning some $7 billion of assets with unsatisfactory returns to acceptable profitability. "If a route to satisfactory performance cannot be found, portfolio action will be taken."

Capital investment plans for the next 2 years remain $12 billion/year. In the longer term, growth in capital employed of some 5%/year is expected, with the highest growth in E&P and gas and power. Upstream volume growth averaging 3%/year until 2005 is expected, while contracted sales volumes of LNG are projected to grow at 6%/year.

This lowered Royal Dutch/Shell´s oil output target. A year ago, a 5% target was being discussed within Shell, and BP PLC has set a target of at least 5.5%. This, coupled with a lower than expected cost-cutting projection, has left most analysts making no change in their own estimates of Royal Dutch/Shell profitability.

Watts said that the strong balance sheet and cash generating capacity ensure a continuing capability to deliver 50% higher cash to shareholders on average in 2001-05 compared with 2000. So far, the share buyback program, which began at the start of 2001, has returned $4 billion to shareholders.

"Over the past 3 years, the group's delivery against its targets has been outstanding," Watts said. He expects the "group´s robust profitability will enable it to perform well going forward in the uncertain business environment."