Shell to Cut 6,500 Jobs as Prolonged Market Downturn Looms

olympus tensioned leg platform shell
Shell’s tensioned leg platform Olympus in U.S. Gulf of Mexico. Photo: Shell

By Rakteem Katakey

(Bloomberg) — Royal Dutch Shell Plc said it’s preparing for a “prolonged downturn” by cutting thousands of jobs and slashing billions of dollars in investments over the next two years. The shares gained the most in almost six months.

The company, which in April said it was confident prices would return to $90 a barrel in three years, on Thursday said that “today’s oil price downturn could last for several years.” Shell is cutting 6,500 jobs this year and plans to reduce capital investment by $7 billion, it said in a statement.

Shell joins BP Plc and Chevron Corp. in cutting costs as the world’s biggest oil producers grapple with a 50 percent slump in crude prices in the past year. They are reducing jobs, deferring projects and selling assets to strengthen their balance sheets and maintain dividend payouts.

“Shell is highlighting the lower for longer oil price scenario and setting up their business to deal with that,” said Aneek Haq, head of oil and gas at Exane BNP Paribas in London. “They’ve now gone further than their peers on cost cuts in this scenario.”

The company’s B shares, the most widely traded, rose as much as 4.3 percent, the biggest intraday gain since Feb. 3, and were trading up 4.1 percent to 1,850 pence as of 11:48 a.m. in London. The stock has dropped 17 percent this year.

Challenging Times

Crude prices have been slow to recover from six-year lows earlier this year as the U.S. produces near the fastest rate in three decades and leading members of OPEC pump at a record pace. Brent entered a bear market again this month and traded at $54.22 a barrel at 11:27 a.m.

“We have to be resilient in a world where oil prices remain low for some time,” Shell Chief Executive Officer Ben Van Beurden said in the statement. “These are challenging times for the industry, and we are responding with urgency and determination.”

Shell, which is buying BG Group Plc for more than $70 billion, also reported a 38 percent decline in second-quarter adjusted profit.

The BG acquisition, to be completed by early next year, will give Shell deepwater assets in Brazil, consolidate its position in Australia’s gas industry and allow greater participation in the U.S.’s emerging LNG export industry. Yet oil’s slump means LNG rates are also declining because most contracts are linked to the price of oil.

The BG purchase would be accretive to cash flow at $67 a barrel in 2016, according to the CEO, who said the deal works even at the current oil price.

Cutting Costs

Shell plans to reduce operating costs by $4 billion this year, before making further cuts in 2016. The Hague-based company employs about 94,000 people in more than 70 countries and territories, according to its website.

“After six months of relative inaction versus industry peers, Shell now looks to be responding to the low oil price environment,” said Alastair Syme, oil analyst at Citigroup Inc. in London.

Shell said the combined investment by the enlarged group with BG next year would reach $35 billion, down from the $40 billion it announced three months ago.

Oil explorers are seeking large discounts from contractors and sending some projects back to the drawing board to find cheaper ways to build them after crude prices crashed.

Chevron this week said it’s eliminating 1,500 jobs to curb spending by about $1 billion. ConocoPhillips has said it’s continuing layoffs while it, too, strives to slash $1 billion in spending over two years.

Beating Estimates

Job cuts at exploration and production companies have accounted for roughly 10 percent of the more than 150,000 layoffs globally throughout the industry, according to Graves & Co., a Houston-based adviser that has closely tracked the cutbacks. That compares with more than 100,000 eliminated from service providers and drilling contractors.

Shell reported second-quarter profit adjusted for one-time items and inventory changes dropped to $3.8 billion from $6.1 billion a year earlier, according to a statement on Thursday. That beat the $3.4 billion average estimate of 16 analysts surveyed by Bloomberg.

Its dividend commitment will remain unchanged at $1.88 per share this year, with at least that amount paid in 2016.

–With assistance from Javier Blas in London.

©2015 Bloomberg News