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Shell to Reduce Capital Spending to Combat Oil Price Slump

According to a report recently published by Reuters, integrated energy major Royal Dutch Shell plc RDS.A might be compelled to reduce its annual spending below $30 billion to survive the oil price slump and to be able to maintain its dividend.

In Feb 2016, Shell closed its merger with BG Group plc − a leading upstream energy player in the U.K. The aforesaid acquisition was completed just weeks after a massive decline in oil prices to a 13-year low of nearly $27 a barrel. Post transaction, the company witnessed a sharp rise in its debt levels to nearly 25% of its revised market capitalization levels along with a decline in liquidity.

Also, the merged company’s 2016 capital expenditure was estimated at around $33 billion, which is quite high by the industry standards. This further burdened the group’s leverage and credit metrics. 

Recently, the Anglo-Dutch company was downgraded by Moody's Investors Service to Aa2 from Aa1. The rating downgrade reflects the credit rating giant’s negative outlook about the company’s elevated debt levels following the BG acquisition. The company had exhausted a massive amount of $10 billion in cash for the takeover.

Hence, the company faces pressure to reduce its capital expenditure in order to sustain dividend payouts and increase the same in the future. Additionally, to offset the financial weakness following the acquisition, Shell plans to divest assets worth as much as $30 billion over 2016–2018. Notably, in the face of last year's oil price rout, the firm slashed around 10,000 jobs to reduce costs and to improve competitiveness.

Headquartered in The Hague in the Netherlands, Shell is one of the largest integrated oil and gas companies in the world. It explores for and extracts crude oil, natural gas and natural gas liquids. It has interests in chemicals as well as in power generation and renewable energy.

Shell currently carries a Zacks Rank #5 (Strong Sell), which implies that the stock will underperform the broader U.S. equity market over the next one to three months.

Some better-ranked stocks in the same sector are Sasol Ltd. SSL, OMV Aktiengesellschaft OMVJF and PetroChina Co. Ltd. PTR. All these stocks sport a Zacks Rank #1 (Strong Buy).

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PETROCHINA ADR (PTR): Free Stock Analysis Report
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