Royal Dutch Shell's CEO delivered goals and plans during the firm's 2010 strategy update that were more specific than in past years. While this meeting helped to identify how Shell plans to boost upstream production and retool downstream operations, it did not change our outlook or fair value estimate.
Shell plans to invest $25 billion-$30 billion annually for 2011-2014, funded in part by as much as $3 billion per year of asset sales. Cost-cutting continues, with plans to carve another $1 billion in cost savings in 2011 and cut 2,000 staff positions by year-end 2011. Shell expects excess cash flow to grow significantly after 2012, when it completes major projects including Qatar gas to liquid and liquefied natural gas facilities and oil sands expansion in Canada. With cash flow needed for a full pipeline of near-term projects, Shell is holding its 2010 dividend rate flat with 2009. Future dividend increases will depend on the impact of oil and gas prices on upstream cash flows, cash cost savings achieved, and new project funding needs. From a 2009 base of $24 billion in cash from operations net of working capital, Shell expects to increase cash flow 50% through 2012, assuming a $60 per barrel oil price and recovery in gas prices and downstream margins. A delay in gas price or downstream recovery could dampen Shell's cash flow aspirations.
On the upstream side, Shell plans to boost oil and gas production 11% from 2009 to 3.5 million barrels of oil equivalent per day by 2012. This requires the timely startup of major projects including the deep-water Perdido spar in the Gulf of Mexico, Pearl GTL and Qatargas LNG projects in Qatar, and expansion at Athabasca oil sands in Canada. Shell highlighted LNG projects in Australia and prospects in deep-water Gulf of Mexico and offshore Brazil for longer-term production growth potential. Exploration and development success allowed the firm to add 3.4 million boe of proved reserves in 2009 for a 288% reserve replacement ratio. This included new reserves for the Perdido and Auger deep-water developments in the Gulf of Mexico, Shell's share of Gorgon LNG in Australia, and the BC-10 offshore project in Brazil. Shell plans to spend $3 billion per year on exploration, targeting prospects in the US Gulf of Mexico, North American tight gas, and Australia. The firm built acreage positions in the Haynesville Shale in Texas and Montney Shale in Canada with plans to ramp up drilling. Shell is also working on plans to expand production at Iraq's Majnoon field.
On the downstream side, Shell indicated discussions were under way to sell 15% of its global refining capacity and 35% of its retail markets. We've been concerned that a crowded market of refining assets for sale by other firms could limit Shell's sale prospects. Management said that if sale prices weren't right, the firm would consider running, closing, or converting facilities to terminals. Shell is moving ahead with downstream growth projects including expansion of its Port Arthur refining complex in Texas and Singapore petrochemical facilities.
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