As we’ve seen, smaller is better when it comes to big energy profits. The prevailing idea used to be that, in order to be successful, an energy stock had to control every part of the cycle — from the wellhead to the gas tank. Becoming integrated was the key to dominance and shareholder returns.
That old idea has fallen flat as smaller, nimbler firms have taken the old integrated giants to the woodshed across many fronts. Spinoffs and asset sales are now the norm for the former giants, and that’s helping in the returns department as several leaner and meaner energy stocks are finally producing stellar results once again.
Taking a cue from former integrated firms like ConocoPhillips (COP) and Marathon (MRO), Shell seems to be setting itself up for similar splits of its businesses. Already, Shell has disposed around $4 billion in assets since June 2013. Over the last three years that number is in the $21 billion range.
However, more could be on the chopping block. Especially given that Shell said in its latest earnings release that it was “entering a new phase of more substantial portfolio change, which will lead to a higher rate of divestments in the coming years”.
Shell has already pledged that its Nigerian assets are under strategic review, while analysts predict that its long-troubled fields in Alaska’s frozen seas and Colorado could also be on the table for potential sales. Also on the sell-block could its chemicals business and its joint venture with Cosan (CZZ) that makes ethanol in Brazil from sugarcane.
A Good Thing for Shareholders
After going on a huge buying binge — spending about $100 billion over the last few years — Shell’s reversal towards asset sales is certainly refreshing. More importantly, that trend could be worth some serious dough to shareholders. Wall Street cheered French rival’s Total’s (TOT) recent restructuring efforts, and it already seems to be riding high on Shell’s preliminary maneuvering.
Goldman Sachs moved shares of the Anglo-Dutch firm up three spots from “sell” to “buy” based on the news of the asset sale. Goldman cited Shell’s exposure to long-life assets that throw off tons of cash flow that will be the focus of its restructuring efforts. To that end, it also upped its price target to $71 per share.
I tend to agree with those assessments. By becoming nimbler and selling off underperforming assets by the bucket, Shell shareholders will be amply rewarded with future earnings growth and cash flows. And getting rid of problem assets will free up the “good” assets to shine brightly, which will help shares trade at higher multiples.
Until then, shares of the firm are trading at bargain-bin prices. U.S.-listed shares of Shell have lost around 5% year-to-date, while the broad Energy Select Sector SPDR (XLE) is up around 17%. That has left shares trading at a P/E of less than 9. That’s less than former integrated rivals like ConocoPhillips, and comes with a juicy dividend of more than 5%.
If you like Shell’s prospects, buy quickly — given the company’s newfound focus, that cheap price may not last long.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.