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Shell Plans a 20% Cut in Its Workforce to Focus on Profitability

Shell plc SHEL, the oil and gas giant, is planning to cut down its workforce by 20%. The job cuts are anticipated to affect the oil and gas exploration staff, per a report by Reuters. The report also mentioned that the company’s exploration and development and subsurface divisions will undergo restructuring and the effect of the layoffs will be felt in Shell’s offices in Houston and The Hague. The layoffs may also affect its offices across Britain, albeit to a lower extent.

After Shell’s new CEO, Wael Sawan, took office, the company has been focusing on creating more value for shareholders by improving its performance and simplifying its business operations. A key part of the strategy includes cutting costs by $2-$3 billion by the end of 2025.

Shell has divested several of its refineries and pulled back from investments in the renewables sector. In 2022, the company sold its Deer Park Refinery to Pemex and its refinery in Mobile, AL, to Vertex Energy.

Impact on Houston

Houston's employment landscape has been heavily dominated by the oil and gas industry for decades. Shell was the second largest employer among energy players in Houston. The company employed an estimated 9,000 workers in the region. However, the layoffs have not yet been confirmed, per Reuters.

Shell is one of the largest energy players globally and has helped Houston establish its importance in the energy landscape. However, the company is now withdrawing its reigns from the region. Notably, its Energy Transition Strategy 2024 report states that Shell will be shutting down about 1,000 gas stations over the next two years. The company will be channeling its resources toward expanding services related to electric vehicles.

Houston is likely to be significantly affected by Shell’s decision to shrink its workforce in the region. The oil and gas industry employed more people than any other sector at its peak and was one of the largest contributors to the city’s economy. However, over time, the industry underwent rapid consolidation and became more efficient. Currently, the oil and gas industry is the fifth largest employer in Houston, trailing behind health care, retail, hospitality and government.

Implications of Energy Transition for Oil Giants

Companies in the sector are now focusing on producing more crude with fewer employees to reduce costs. The reduction in spending is highly influenced by the immense pressure to return capital to shareholders. As a result, companies are trying to reduce capital expenditures and redirect profits toward generating more shareholder value.

In 2013, Shell and many other major players in the energy sector allocated more than $250 billion to creating jobs. These numbers have waned slowly, and Shell is working on nearly half the budget now.

Per analyst reports, Shell currently spends way more on exploration and production activities compared to its competitors. The recent focus on cutting down expenses may be aimed at aligning the company with the current industry standards. Furthermore, investors are now raising concerns regarding the possible effects of the transition (from fossil fuels) on their profitability. Consequently, companies must now be more disciplined and cautious in their investment decisions to navigate the shift toward lower-carbon energy.

Energy giants are currently facing the bigger question of how much to invest in exploring and developing long-term projects related to fossil fuels amid forecasts of declining oil demand. S&P Global warns that the recent reductions in oil exploration spending may result in a gap between supply and demand in the future.

Despite the anticipated decrease in oil demand, fossil fuels will remain in the picture for decades to come. As a result, oil companies must carefully balance their investments to ensure they can satisfy future requirements while adapting to changing market conditions.

SHEL’s Zacks Rank and Key Picks

Currently, SHEL carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the energy sector are PEDEVCO Corp. PED, MPLX LP MPLX and VAALCO Energy EGY. PEDEVCO and MPLX presently sport a Zacks Rank #1 (Strong Buy) each, while VAALCO Energy carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PEDEVCO is engaged in the acquisition and development of energy assets in the United States and Pacific Rim countries. The company stands to benefit significantly from its holdings in the Permian Basin, one of the most prolific oil-producing regions in the United States, as well as in the D-J Basin in Colorado, which includes more than 150 high-quality drilling locations. Combined with bullish oil prices, this is expected to boost the company's production and overall profitability.

MPLX LP owns and operates a wide range of midstream assets. The partnership's midstream assets include oil and natural gas gathering systems and transportation pipelines for crude, natural gas and refined petroleum products. MPLX is least exposed to commodity price fluctuations as it generates stable fee-based revenues. Furthermore, it surpasses its industry peers in terms of distribution yield, reflecting its commitment to returning capital to its unitholders.

VAALCO Energy is an independent energy company involved in upstream business operationswith a diversified presence in Africa and Canada. Having a large inventory of drilling locations in premium Canadian Acreage, the company’s production outlook seems bright.

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