Executing asset sales is crucial for reducing debt and retaining shareholder confidence

By Sarah Kent

LONDON -- Royal Dutch Shell PLC has a goal for 2017: Slimming down.

The British-Dutch oil-and-gas giant bulked up in February with the roughly $50 billion acquisition of BG Group PLC, giving Shell a dominant position in liquefied natural gas and some of the world's most prized offshore oil fields in Brazil. It also saddled the company with a mountain of debt -- $78 billion at the end of the third quarter -- that is higher than peers such as ExxonMobil Corp.

The company helped sell investors and analysts on the value of the BG deal by promising to unload $30 billion in assets from 2016 through 2018. Not only would it help pay down some of that debt, but it would prune some unloved assets and shore up confidence that the company could keep paying dividends and provide cash for a share buyback that could begin as soon as 2017.

But in 2016, Shell announced details of asset sales amounting to only about $5 billion -- short of the $6 billion to $8 billion the company had said it would reach last year. As recently as November , Shell's Chief Financial Officer Simon Henry said the company expected to hit that target.

The company declined to comment. Shell has said it is likely to back-end its divestment program and is more concerned with making sure it gets good value for the sales.

Executing more deals is crucial for retaining shareholder confidence in Shell's ability to keep paying its dividend and reduce its debt levels. Its debt-to-equity ratio of 29% is higher than its four major competitors: Exxon, Chevron Corp., BP PLC and Total SA.

"Shell's high net debt and the slow progress against its divestment plan are the last major concerns for investors, with the view that it remains the key risk for a dividend cut," said research firm Sanford C. Bernstein in a note.

Deal making was slow across the energy sector in 2016, when oil prices often were below $45 a barrel. With Brent crude, the international benchmark, now hovering around $56 a barrel, there is hope among investors and analysts that Shell can start selling off unwanted assets for a fair price.

"This is a three-year plan and we're starting to see the oil price start to recover, which is helpful," said Simon Gergel, chief investment officer for U.K. equities at Allianz Global Investors. "I would be pretty confident they can get a longway down the road in the three years."

Deal making in the sector already seems to be picking up, with BP announcing a flurry of agreements in the past month.

Shell was on its own year-end spree, announcing the completion of a tricky plan to sell its stake in a Japanese refining joint venture for $1.4 billion and an agreement to give up its Australian aviation-fuels business for $250 million.

Those are positive steps but still came in shy of its $6 billion to $8 billion range for 2016.

The company has said it is already working on 16 asset sales with a value of more than $500 million and is expected to close some of them early this year. That is likely to include a package of fields in the North Sea worth about $3 billion and assets in Gabon worth nearly $1 billion, according to a person familiar with the situation.

Shell is reviewing whether to sell operations in New Zealand and Thailand, among other places. In Iraq, the company is in discussions to sell its stake in the West Qurna oil field to a Japanese consortium, people familiar with the matter said.

Many of the assets Shell sold in 2016 were from its refining and marketing division, which has proved more resilient to the oil-price slump and an easier place for deal making. But deals for exploration and production assets have proved harder and could remain difficult even if oil prices hover around $55 to $60 a barrel in 2017 -- more than 20% higher than 2016's average.

In the energy sector, buyers and sellers in many cases are still struggling to find a balance on the question of pricing assets, according to analysts. Iain Reid, senior oil-and-gas analyst at Macquarie, said Shell seemed determined to sell at a price of its choosing, which could push the completion of its asset-sale plan beyond 2018.

"Shell is not prepared to sacrifice too much," Mr. Reid said.

--Michael Amon contributed to this article.

Write to Sarah Kent at sarah.kent@wsj.com

(END) Dow Jones Newswires

January 04, 2017 02:47 ET (07:47 GMT)

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