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Shell slashes cost base to confront ‘unique’ COVID-19 challenges

Image: Shell.

Image: Shell.

O&G major Shell is to slash its cost base in response to the growing COVID-19 crisis and economic uncertainty.

Cuts to operating costs, cash capital expenditure and working capital, announced this morning, will reinforce the company’s business resilience in coming months, it said, by freeing up as much as US$9 billion (£7.7 billion) of free cash flow on a pre-tax basis.

The company will reduce its underlying operating costs by US$3-4 billion (£2.6 – 3.4 billion) per annum over the next 12 months compared to 2019 levels.

Talking to Current±, Shell added that every business and function will be contributing to the Opex savings and this will mainly be from discretionary spending, but did not confirm whether it would mean job losses.

Additionally, cash capital expenditure will be reduced to US$20 billion (£17.1 billion) or below for 2020. This is a cut of US$5 billion (£4.3 billion) from the level originally announced.

Some examples of reductions have already been made public, such as example the suspension of construction activities at Shell’s LNG Canada project and its Pennsylvania Cracker petrochemical’s site.

Chief executive officer of Royal Dutch Shell Ben van Beurden, said that as well as protecting the company’s staff and customers, Shell was “taking immediate steps to ensure the financial strength and resilience of our business".

“The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past.”

“In these very tough conditions, I am very proud of our staff and contractors across the world for maintaining their focus on safe and reliable operations while also ensuring their own health and welfare and that of their families, communities and our customers.”

The company is also looking to materially reduce its working capital and has decided not to continue with the next tranche of its share buyback programme. The company has been working to reduce its issued share capital, in an effort to offset the number of shares that have been issued under its scrip dividend programme, which has historically seen investors receive shares rather than cash dividends.

Shell is still planning to go ahead with its divestment programme, with the aim of divesting assets worth more than US$10 billion (£8.6 billion) in 2019-20. However, the timing of this will depend on market conditions it stated.

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