LONDON • Royal Dutch Shell is more than US$4 billion (S$5.71 billion) short of its asset-sales target for the year, prompting credit ratings agencies to warn that its record debt will not start shrinking soon enough.
Shell piled up borrowings following its biggest acquisition, the purchase of BG Group, and needs to hit disposal targets to help pay for it and stave off rating reviews, according to the agencies. The company sold US$1.7 billion of assets in the first nine months of this year, according to a Nov 1 statement, well short of its US$6 billion to US$8 billion guidance.
The US$54 billion BG acquisition has made Shell the world's second-biggest oil company by market value and increased its production and cash flows, helping it beat earnings estimates from 14 analysts last quarter. Yet, one overhang remains - debt - and that only got worse in the three-month period.
While Shell has made reducing this its top priority, it will depend on asset sales to do so, and that is not easy in a low oil-price environment. "The quantum of debt is quite alarming," said Mr Maxim Edelson, senior director at Fitch Ratings, which downgraded Shell in February because of growing debt. "Disposals play a very big part for credit ratings."
Shell set a target of US$30 billion of asset sales in the three years to 2018 following the purchase of BG Group. In addition to the US$1.7 billion of divestment from January to September, the company announced a US$1 billion sale of assets in Canada last month. It is also working on about US$5 billion of disposals, including sales of oil fields in the North Sea, its stake in Showa Shell Sekiyu KK in Japan and splitting assets in the Motiva joint venture with Saudi Arabian Oil in the United States, Shell said on Nov 1.
Some of these are not likely to be completed this year. Shell's chief financial officer Simon Henry told analysts this month that he was sure that the Motiva deal would not be done this year. The company has 16 major asset-sale transactions in progress, Mr Henry said. "There's no reason to think that the US$30 billion figure won't be achieved," he said. At the same time, "this is a value-driven - not a time-driven - divestment programme."