We have recently recommended BP as a better investment opportunity than Royal Dutch Shell but a distinct momentum change was detected as the two oil majors announced their latest strategy updates. BP has over the past couple of years been reaping the rewards of having become leaner and meaner, but now it might be Shell's turn. Shell chief executive Peter Voser stressed that, in the near term, Shell's focus would be all about raising its game on performance: production would be increased, costs cut and unprofitable refineries and retail outlets either sold off or closed.
Both firms have exciting portfolios of projects to boost production: Shell is maturing projects in North American tight gas and liquefied natural gas in Australia. BP is focusing on deepwater production and global gas, including unconventional gas. BP currently produces 4m barrels of oil equivalent per day (boepd) and projected solid but unspectacular production growth of 1-2 per cent a year to 2015. In contrast, Shell expects 11 per cent production growth to 2012, equivalent to a much more racy 2-3 per cent a year, although this will only ultimately lift production to 3.5m boepd.
Shell announced aggressive plans for improving profitability, identifying more than $1bn (£657m) of cost savings and announcing 2,000 more job cuts by 2011, mostly in retail sales and corporate. It expects annual asset sales of $1bn-$3bn as it withdraws from non-core positions across the group, and plans to exit from 15 per cent of its margin-constrained refining capacity and the least profitable 35 per cent of its retail markets.
Shell expects to grow cash flow by 50 per cent from 2009 to 2012, assuming an average $60 a barrel oil price and "more normal" gas prices and refining margins. If the current $80 a barrel oil price persists, 2012 cash flow could be more than 80 per cent higher than 2009 levels. But here lies the greatest threat to Shell's plans. Its cash breakeven requires $80 a barrel oil during the two years before major projects come onstream to boost production. Should the oil price fall heavily in that period, lower cash flows might force it to increase gearing to finance completion of new projects.
