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Shell Needs To Divest Assets In Order To Afford BG Deal

Royal Dutch Shell is selling even more assets as it tries to cope with the persistent fall in the price of oil and its controversially expensive merger with BG group, approved last week by the shareholders of both companies.

In a statement Monday in London, the Anglo-Dutch oil giant said it plans to sell its 51 percent stake in the Shell Refining Co. (SRC) to Malaysian Hengyuan International Limited for $66.3 million. This is in addition to Shell’s sale of its marketing operations in Denmark and Norway, its liquid petroleum gas business in France and one-third of its shares in its Japanese arm, Showa Shell Sekiyu KK.

Shell also has recently sold off refining operations in Australia and Italy, as well as some of its retail outlets in Britain.

Related: Oil Slides As Oil Majors Report Poor Results

Besides shedding such assets, Shell also says it’s prepared to cut capital expenditure and eliminate jobs to lessen the impact of lower oil prices. Last week Shell said its financial report for 2015, which is expected on Thursday, likely will show profits from the year to be between 40 percent and 50 percent lower than in 2014.

“The sale is consistent with Shell’s strategy to concentrate its global downstream footprint and businesses where it can be most competitive,” the company said in Monday’s statement. But it stressed, “Malaysia continues to be an important country for Shell” and that it would continue investing in the country’s energy industry.

The 19-month-old plunge in the global average price of oil isn’t the only reason Shell needs to raise cash. It also must pay for the purchase of BG, a merger announced in April with an offering price at the time worth nearly $70 billion in Shell stock. Since then, because of lower oil prices, the value of the stock offering has plunged to about $51 billion.

Related: Managing Risk Through A Downturn

Further, Shell originally expected to make about $35 billion in capital investments in the new merged company, but by September its estimate had dropped by $2 billion, or 5.7 percent.

The deal still looked good to BG shareholders, but there was enough resistance on Shell’s side to make approval of the deal look chancy. Before the vote, one large Shell investor, Standard Life, the savings and investment company, called the purchase “value destructive.”

And one private investor, Mark Van Baal, who leads a coalition of small shareholders of Shell, said he wasn’t backing the deal because “[t]here are a lot better ways to spend [$51 billion].”

Related:Oil Majors Report Bleak Earnings As Glut Persists

Nevertheless, the shareholders in both companies approved the deal last week.

Shell isn’t the only energy company divesting assets in Malaysia to help ease the pressure of low oil prices. Lundin Petroleum of Sweden says it is selling its stakes in three production-sharing contracts in the country to the Dutch energy investing company Dyas.

Lundin didn’t say how much it was asking for the sale to Dyas, but last month it also agreed to sell one of its floating production and storage vessels for $265 million to M3Energy Investment Ltd., an energy company controlled by the Malaysian government. And last week it said it would be spending no more than $145 million on exploration and production in 2016, a 64 percent reduction from 2015.

By Andy Tully of Oilprice.com

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