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Shell Hopes To Sell $30 Billion In Assets, But Timing Is Terrible

Shell Hopes To Sell $30 Billion In Assets, But Timing Is Terrible

Royal Dutch Shell is planning to sell assets worth a staggering $30 billion in a bid to prop up its balance sheet, after completing the $53-billion acquisition of BG Group last month. The majority of these soon-to-be-offloaded assets are in the midstream and downstream operations of the company.

The plans were first mentioned by Shell’s chief executive during a conference call at the beginning of February. Two anonymous Bloomberg sources familiar with the divestment program stated that this divestment may include pipelines in the U.S., a stake in a gas project in Trinidad and Tobago, and interests that Shell holds in oil and gas fields in India. Related:It’s Time For Canadian Oil To Re-Shuffle, Re-shape And Rebound

Like its peers, Shell has been busy weathering the effects of the oil price slump over the last year and a half. It has sold assets, cut costs, shelved major projects and upgraded operating efficiencies. Shell’s actions seem to have paid off despite a credit rating downgrade from Fitch that followed the completion of the BG Group deal.

The downgrade was prompted by the fact that the acquisition--the only major deal in the energy industry since June 2014--took a $10-billion bite from Shell’s cash coffers.

Between 2014 and 2015, Shell sold assets worth $20 billion, which could be cause for optimism regarding this new asset sale plan. Related: Genel’s Stock Takes A Hit As It Slashes Reserves In Half

On the other hand, they reverse may hold true: During 2015, energy firms still had cash from the bright past when oil sold for over $100 a barrel. This year, however, most players in the field are financially exhausted, and few have the interest and money to make substantial buys.

Shell Chief Executive Officer Ben van Beurden expressed his optimism in a February 4 conference call by saying, “The buyers are there, particularly in the downstream and some local gas markets, and then more non-traditional routes such as MLP, private equity, and some other oil and gas companies.” van Beurden did acknowledge that this year is not the best time for sellers, and that he expects less than one-third of the $30-billion target to come this year.

Buyers may well be there, especially if what’s on offer is in the midstream and downstream of the industry. Oil terminals, pipelines and refineries are the most lucrative part of the oil and gas business at the moment. In fact, for Shell and its peers, the downstream is to a great extent what helped them stay in the black. Related: Anadarko Slashes 80% Of Onshore Rigs, To Lay Off 95% Of Contractors

This raises the question of whether Shell is doing the right thing. In the medium term, if these divestments should come to be realized, it will certainly strengthen the company’s balance sheet.

But what about the long term?

Oil prices could be on the mend as producers all over the world are freezing or cutting output. The rebalancing of the market may be on the horizon; yet few believe oil will return to three-digit levels or even high double-digits, so the downstream will continue to be a very important earnings generator for any big energy company. Especially if there is another price rout – a possibility any long-term planner should consider.

By Irina Slav for Oilprice.com

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