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Shell Guides Down 2016 Capital Expenditure Budget by $2B

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Royal Dutch Shell plcRDS.A is planning to slash its 2016 capital budget amid the persistent weak crude pricing environment. The oil major is on its way to acquire BG Group plc, a leading upstream energy player in the U.K. The acquisition is anticipated to close by early 2016.

As per the prior guidance, the combined company was previously expected to invest $35 billion next year. However, Shell has lowered the budget by $2 billion to $33 billion. On top of that, the company reduced its 2015 budget by $1 billion to $29 billion.

Oil price has been weak for more than a year now. However, we believe that the most recent oil slide to below $40-per-barrel level compelled the company to cut its combined capital spending budget further. As per media records, the pricing weakness reduced the Shell-BG deal value to $53 billion − as of Dec 18 − from $70 billion announced in April.

To counter the effects of the oil price slump, the company also plans to lower its operating expenses. Shell expects its costs reduce by $4 billion this year as compared to 2014. Moreover, in 2016, expenses for the combined firm will likely contract by $3 billion Such large-scale cost reduction in 2016 will likely come on the back of 2,800 job cuts post the Shell-BG merger.

Meanwhile, the merger is expected to broaden Shell's position in the liquefied natural gas resource market and in Brazil. This will also help boost production and maintain dividend and investment levels for the company.

In fact, many analysts estimate that the value of the combined company will be over $296 billion. Hence, the transaction will boost Shell's present market capitalization of $141.03 billion, reaching it close to the world's largest publicly traded oil company, Exxon Mobil Corporation XOM , which is currently valued at $323.25 billion.

Moreover, some analysts believe that, in terms of market value, the new company will be twice the size of London-based BP plc BP and may even beat Chevron Corp CVX .

Shell currently carries a Zacks Rank #5 (Strong Sell), implying that the stock will significantly underperform the broader U.S. equity market over the next one to three months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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