Royal Dutch Shell (NYSE:RDS.A) this week announced two major asset sales, one involving the reduction of its stake in Australian independent oil and gas company Woodside Petroleum (ASX:WPL) and the other regarding the IPO of its midstream subsidiary, as part of its strategy to divest some $15 billion worth of assets in 2014 and 2015.

Will these asset sales help Shell improve its financial performance and boost shareholder returns? Let's see.

Photo credit: Wikimedia Commons.

Shell's recent asset sales announcements
On Monday, Shell announced the sale of a 19% stake in Woodside Petroleum, a deal that is expected to raise $5 billion. On Wednesday, the company announced that it had filed a registration statement with the U.S. Securities and Exchange Commission related to the proposed IPO of its pipeline subsidiary, which could raise up to $750 million.

Under the terms of the first deal, Shell will sell 78.3 million of its Woodside shares to investors and Woodside will buy back the same number of shares from Shell. That comes out to about 156.5 million shares, representing 19% of Woodside's issued share capital. When the deal is completed, Shell will have a 4.5% stake in Woodside.

Meanwhile, Shell's midstream subsidiary, Shell Midstream Partners, plans to go public in the second half of this year and list its common units on the New York Stock Exchange under the ticker symbol "SHLX." The subsidiary is to be structured as a master limited partnership, a commonly used corporate structure in the energy sphere.

What impact will asset sales have?
The first deal looks to be a positive both for Shell and Woodside. From Woodside's viewpoint, repurchasing 78.3 million shares should boost earnings per share and is one of the more shareholder-friendly moves the company could have pursued. The deal will also allow Woodside to pursue its own business strategy by removing the overhang of Shell's involvement.

From Shell's perspective, the deal will bring in much-needed cash and allow the company to focus on its highest rate of return projects -- part of its new strategic focus to improve its capital efficiency, which has significantly lagged peers such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) in recent years.

Due largely to ill-timed investments in U.S. shale, continued security issues at its Nigerian operations, and its beleaguered drilling program in Alaska's Chukchi Sea, Shell's return on capital employed, or ROCE, averaged under 15% from 2008 to 2012. By comparison, ExxonMobil delivered an average ROCE of nearly 25% over the same period, while Chevron's came in at around 20%.

The second deal will raise a significant amount of cash for Shell while allowing it to maintain operational control of Shell Midstream Partners's midstream assets, which are positioned strategically in Texas and Louisiana. As the MLP's general partner, Shell would be entitled to a share of its cash flow, which tends to be highly stable due to the nature of the energy midstream business.

How Shell plans to improve its performance
So far, Shell has sold or announced the sale of some $12 billion worth of assets. Many of these divestments have been related to its two worst-performing businesses -- downstream and upstream North America. Some analysts believe the company may substantially increase its 2014-2015 asset sale target of $15 billion. 

By divesting underperforming refining assets in places such as Norway, Denmark, and the Czech Republic, the company believes it can improve its downstream segment's return on capital to 10%-12%,  up from about 7% currently. Similarly, sales of North American shale assets and a 20% reduction in upstream Americas spending should also gradually improve that segment's return on capital.

In combination with asset sales, Shell also plans to dramatically reduce capital spending from a record $44.3 billion in 2013 to roughly $37 billion this year. At the same time, the company's cash flow is set to rise sharply thanks to the start-up of major high-margin oil projects including Mars-B and Cardamom in the Gulf of Mexico.

Shell expects to generate roughly $45 billion in annual cash flow and maintain spending significantly below that level over the next few years. Judging by recent results, the company is off to a good start. Its operating cash flow came in at $14 billion  in the first quarter, while capital spending was just $10.7 billion, helping the company generate $6 billion in free cash flow.

Investor takeaway
Shell is taking major steps to improve its financial performance and boost shareholder returns. Sales of under performing downstream and upstream North American assets are providing much-needed cash and should help the company gradually improve its return on capital. Overall, the combination of asset sales, reduced spending, and higher cash flow should allow Shell to grow its dividend at a stronger pace over the next few years, assuming commodity prices remain high and assuming that the oil giant can bring new projects online on time and on budget.