The last year was a tough one for integrated oil majors. Thinning refining margins put a serious dent in downstream earnings, and upstream profitability failed to impress despite cooperative energy prices. As a result, it's not entirely surprising to see members of Big Oil such as BP (NYSE:BP) sell off non-critical assets.
Even independent exploration and production major ConocoPhillips (NYSE:COP), which isn't nearly as integrated as its peers after spinning off its downstream and midstream business, got in on the asset sale game last year.
However, both BP's and ConocoPhillips' asset sales look downright modest in comparison to the outright fire sale Royal Dutch Shell (NYSE:RDS.B) will soon embark on. Royal Dutch Shell unloaded billions last year, with even greater amounts to be sold off over the next two years. That's why investors may have legitimate cause for concern about the fate of Shell's future growth trajectory.
Addition by subtraction?
BP notified investors of its intention to divest assets deemed non-critical to its future. Of course, BP has plenty of reason to do this. It's still battling the financial damage caused by the Gulf of Mexico oil spill. In preparation, BP has shed assets to buffer its balance sheet against likely further penalties resulting from its ongoing civil trial. Going forward, BP plans to divest approximately $2 billion to $3 billion per year, with the aim of optimizing its portfolio.
Even ConocoPhillips is streamlining itself, which it doesn't necessarily have to do since it navigated 2013 much better than its integrated rivals. Thanks to its status as an exploration and production pure-play, Conoco wasn't hit by the horrible environment for refining activities and grew its adjusted earnings by 6% last year.
Nevertheless, Conoco disposed $10.2 billion worth of assets last year. Its reasoning was fairly straightforward: Conoco sought to exit riskier international geographies, such as Algeria and Kashagan, to focus on more promising U.S.-based plays. This makes sense, of course, since its combined operations in the Eagle Ford, Bakken, and Permian Basin domestic plays increased production by 31% in the fourth quarter.
Royal Dutch Shell's divestment plans top them both
Royal Dutch Shell's divestment plans stand far above those of its peers. In all, Shell intends to unload $15 billion worth of assets over the next two years. In addition, Shell is significantly paring back its capital spending plans, including the recent decision to suspend drilling in the Arctic off the coast of Alaska.
These initiatives are what Shell management refers to as the "hard portfolio choices" necessary in light of its poor underlying performance in 2013. This stands to reason, since Shell's core net earnings fell by 23% last year.
To boost investor morale, Shell management points to a number of key start-ups in 2014 that it hopes will get cash flow going in the right direction. These include the recently announced positive well test results in onshore Albania, where Shell owns a 75% interest. Shell also added significant acreage during the fourth quarter of 2013 in Australia and Greenland. The hope is that these new positions will compensate some of the lost production once its huge asset sales get under way.
Royal Dutch Shell may struggle to grow
To be fair, Royal Dutch Shell's capital discipline is admirable considering its struggles in 2013. Management fully expects the new Shell to be a streamlined, focused company that operates in a much more efficient manner. While this may very well materialize, it's hard to see how Shell will find enough avenues for growth once it divests $15 billion in assets over the next two years. Its new projects for the upcoming year are promising, but a lot will have to work out in Shell's favor for growth to get back on track in 2014.
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