The oil industry is in disarray, thanks to the coronavirus pandemic that ripped apart most sectors until now. China's fuel demand is visibly dented in the aftermath of large-scale travel bans imposed globally. To worsen matters, oil prices plummeted as Saudi Arabia waged a price war and ramped up its oil production significantly in retaliation to Russia’s resistance to lower its crude production at the OPEC meeting.
Notably, West Texas Intermediate commenced the year with a little above $60 per barrel of oil. However, this uptick was transitory with the WTI price plunging to $20.37 last week, marking the lowest settlement since February 2002..
Such headwinds compelled the energy players to reassess their strategies as well as capital spending budgets. Even the ‘Big Oil’ companies don’t seem to be immune to this price crash.
In response to the bearish oil environment, Royal Dutch Shell plc (RDS.A - Free Report) plans to trim its 2020 capital expense by a minimum of $5 billion from the past projection of $25 billion along with material reductions in working capital. It further aims to cut operating costs by $3-$4 billion over the next 12 months. These capex measures are anticipated to enhance Shell's free cash flow generation to $8-$9 billion on a pre-tax basis.
Apart from the cost cuts, Shell suspended its $25-billion share buyback program to weather the current oil price woes. This integrated energy player maintains its divestment plans worth $10 billion of assets in 2019-20. Execution of the same is subject to certain market conditions.
Notably, investors should know that this Netherlands-based company boasts a solid financial foundation with $20 billion in cash and cash equivalents. Apart from robust cash reserves, the company can tap into its $10 billion of undrawn credit lines while having an access to extensive commercial paper programs.
Even though Shell hopes to gain traction from these key endeavors, it looks to keep close tabs on the commodity price movement, aligning with the capex adjustment plans further in response to a volatile price scenario.
By dint of its strategic capex-cut move, Shell joins other energy players including Matador Resources Company (MTDR - Free Report) , Apache Corporation (APA - Free Report) and Occidental Petroleum Corporation (OXY - Free Report) . These industry players aim to overcome the tough times while sustaining financial flexibility and operational excellence. Notably, solidifying the companies’ cash-boxes during a phase when oil prices yield zero profits to most producers, is indeed an astute action.
This Zacks Rank #5 (Strong Sell) stock has shed 57.3% of value in the past year compared with the 58.9% decline of the industry it belongs to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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