Will Asset Sales Be Enough for Shell?

Royal Dutch Shell (NYSE: RDS-A  ) , Europe's largest oil company by market capitalization, has recently come under a great deal of pressure from shareholders, who are worried that the company is spending too much while not generating sufficient cash flow to maintain decent dividend growth.

But these concerns may be overblown. Not only is operating cash flow for the period 2012-2015 expected to come in about 30%-50% higher than cash flow during the previous four-year period, but Shell also has plenty of non-core assets that it can sell to raise cash. Let's take a closer look.

Potential assets for sale
To help offset its record capital expenditures, Shell recently announced that it would significantly accelerate its pace of divestments in 2014 and 2015. Having already spent $30 billion in 2012 and $45 billion in 2013, the company will need to raise at least $15 billion through asset sales if it is to meet its spending target of $130 billion over the period 2012-2015.

Some of the assets that could be next on the chopping block include mature fields in the North Sea, additional refining assets, and other projects that have not yet been finalized, a person familiar with the matter told the Financial Times.

Shell may also choose to divest its 23.1% interest in Australia's Woodside Petroleum (ASX: WPL  )  according to Fred Lucas of JPMorgan Cazenove, who reckons that Shell could sell as much as $30 billion worth of assets over the next two years.

Divestment mode
At any rate, it appears that Shell is entering into a major divestment phase. Last year, the company announced strategic reviews of its loss-making North American oil and gas properties and its Nigerian business, which continues to be plagued by theft and sabotage. After a thorough assessment, Shell put up for sale acreage in Texas' Eagle Ford shale, Kansas' Mississippi Lime play, and the sabotage-prone eastern Niger delta.

It also backed out of the Mahogany shale oil project in Colorado and recently decided to scrap plans for a gas-to-liquids (GTL) facility in Louisiana, leaving South Africa's Sasol (NYSE: SSL  ) as the only company currently pursuing a commercial GTL plant in the U.S. Shell's decision to abandon the project was due largely to the plant's high cost estimates, which ballooned from an initial $12.5 billion to $20 billion, and uncertainty regarding long-term oil and gas price differentials.

The Anglo-Dutch supermajor has also been downsizing its refining business, especially in Europe, where weak demand for fuel and overcapacity have hurt refining margins. Over the past few years, it has divested refining facilities in Germany, the UK, and Sweden, and put its only refinery in Australia up for sale last year, joining other big oil companies that have also parted ways with refining operations.

BP (NYSE: BP  ) , for instance, sold its Carson, California, refinery to Tesoro (NYSE: TSO  ) , and its Texas City, Texas, refinery to Marathon Petroleum (NYSE: MPC  ) for roughly $2.4 billion each last year, as part of its plan to revamp its U.S. downstream business. The British oil giant is now focusing exclusively on three northern refineries which have better access to advantaged crude feedstocks.

The bottom line
Though investors are still concerned about Shell's high level of spending, I think the company's decision to invest throughout the cycle should soon begin to pay off. With numerous non-core divestment opportunities at its disposal and with several new high-margin oil projects slated to come online this year, Shell expects its operating cash flow for the period 2012-2015 to total $175-200 billion.

Not only would that easily cover its expected capital spending of $130 billion over the period, it's also approximately 30%-50% higher than operating cash flow in the 2008-2011 period. If Shell can continue to successfully whittle down its portfolio, improve capital efficiency, and deliver on its cash flow promise, I see no reason why it can't grow its dividend at a modest pace and outperform many of its peers over the next few years.

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