The management teams at integrated oil and gas majors like Royal Dutch Shell have a difficult job. They need to convince investors and analysts -- people that expect results over relatively short-term timelines -- to look well into the future to see the value in the company. So on the company's most recent conference call, here are some of the things that management wanted to highlight that would appease the shorter-term thinkers while keeping its eye on the long term.
1. We're cutting costs across the board to become more competitiveA major component of being successful in the oil market today is squeezing out as much operational costs savings as possible. Savings on the day to day operations of the company are most effective because they create value today without compromising the future through reduced capital spending. In this front, CFO Simon Henry highlighted that the comapany has enacted some major cost cuts in the past 12 months.
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$4 billion is a pretty impressive amount to cut from operations, but keep in mind with a company the size of Shell that is a 10% cut overall. It helps, but it is nowhere near the 50% decline in oil prices over the past year or so that has affected revenue.
2. We're making some adjustments to capital spending, but not too many right nowFor the past two years, Shell has actually been significantly reducing its capital expenditures -- well before we started to see the decline in oil prices. However, Mr. Henry wanted to remind us that even though the company is perhaps shifting some of its capital plans around to delay a project here or suspend a longer-term project there, it still plans on making rather significant investments over the long term.
Almost all of the oil and gas majors use 2017 as their benchmark years for completing their current capital programs. As we get closer and closer to that date, we will start to see some of the new projects that will come into focus.
3. Our new projects will deliver lots of free cash flow if this happens...One element that Shell has focused on in recent years hasn't been on actual production targets, but instead just bringing online the projects that will deliver substantial cash flow to the company. As Mr. Henry pointed out, the company believes that the major projects it has been working on since 2012 and before will result in $8 billion in free cash flow by 2020.
Source: Royal Dutch Shell investor presentation.
The one element that may throw caution to the wind for some investors is that for this plan to work, the price of oil will need to average $70 per barrel. Perhaps that happens, perhaps it doesn't, but a $8 billion free cash flow cushion at $70 per barrel seems to suggest that there is some wiggle room there.
4. We foresee the future as a gassy oneOne thing that really stood out this past quarter was the company's stance on natural gas and its future potential for the global market.
Based on the company;s major investments in LNG, though, it's not that surprising. A major reason that it is purchasing BG Group is because the company has a pretty sizable LNG portfolio that should integrate well into Shell's LNG investments. However, CEOBen van Beurden wanted to make it clear that for LNG to be successful, the company will need to drive down its costs:
This is becoming an issue with new LNG projects. They are becoming more and more expensive to build. Mr. van Beurden did also mention that the company was looking tat some standardization processes across its LNG development projects should bring some major cost savings.
5. Efficiency in shale will only go so farOver the past year, shale drilling in the United States has been much more resilient to the drop in oil prices because of gains in efficiency that have significantly cut costs. This led to some analysts wondering if the cost-cutting measures in shale have not only ensured that it will stick around, but could actually mean it will keep oil prices at where they are today for several years down the road. In response to this, Mr. van Beurden wanted to ensure analysts that efficiency gains are happening, and that there are some other factors that could prevent shale from keeping prices down that long.
This is something to consider when looking at companies in the independent space today. The economics on a well-to-well basis might suggest that they can survive at lower oil prices, but that doesn't include the investments in infrastructure to get that oil and gas to market and therefore the growth at today's prices will be constricted to existing infrastructure. Perhaps he is right, perhaps not. But it appears that Shell will be basing some of its investment decisions on that mantra going forward.
What a Fool believesFor the most part, Shell's executive team would prefer that you look at the long-term outlook for the company rather than what's going on in the market on a day-to-day basis.
After all, some of the projects it's bringing online will be part of the production portfolio for 20-40 years. This is a major reason that it sees LNG as a major component of its long-term portfolio, and even though some of its projects might not meet intended targets at today's oil prices, it's almost impossible to project today's prices out over the company's investment time horizon.
In the meantime, it is going to cut costs, and ensure that it has the cash flow to continue its investments in the future while still providing shareholders with decent returns through its dividend program.
The article 5 Quotes From Royal Dutch Shell's Management You Need to Know originally appeared on Fool.com.
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