by Aaron Levitt | February 5, 2014 10:31 am
Sometimes you just have to say goodbye to a stock, even when it has been good to you over the years. In this case, I’m taking about major integrated oil stock Royal Dutch Shell (RDS.A, RDS.B).
The problem for Royal Dutch Shell stock — as with most of its integrated rivals — is that production continues to slip. Old legacy fields continue to dry at a rapid pace, and new sources of supply that will really move the needle are becoming harder to find. All of which is crimping profits at the majors.
However, Royal Dutch Shell stock was different. While other majors like ConocoPhillips (COP) and Exxon (XOM) were playing it relatively safe with their exploration budgets and by sticking close to home, RDS.A was willing to go the extra mile into some pretty ambitious energy sources. From Australian natural gas to drilling in the Arctic Circle, Shell could be seen as the “growth” orientated major.
Unfortunately, those go-getting plans haven’t gone according to plan, and now RDS.A is the process of closing up shop in several of these locations and selling the assets.
And with many years of underperformance behind it, it may just be time to sell Royal Dutch Shell stock out of your portfolio.
The latest “headache” for RDS.A stock and its investors is the firm’s wrap-up of its projects in Alaska. The potential for Shell’s assets in the deepwater of the Chukchi Sea was great, as the field is estimated to contain almost 20 billion barrels of crude. However, the $5 billion Shell has spent on leases, permits and various equipment is proving too expensive.
Especially since the company hasn’t pulled a drop of oil from the ocean yet.
After a series of costly accidents, such as a drilling rig mooring and resulting oil spill, coupled with other legal and weather issues resulting from the field, RDS.A stock is putting drilling on hold in Alaska for another year. This is now the second year in a row that Shell hasn’t drilled in the region.
That strike is just the latest blow for the integrated major. Fourth-quarter earnings for RDS.A stock can attest to that.
For the fourth quarter and full year 2013, Royal Dutch Shell managed to see it profits plunge 40% from a year earlier. The dour news can be felt across the board. Year-over-year, upstream earnings were off 45%, while Shell’s downstream and refining earnings dropped a whopping 58%. Perhaps the worst blow is that despite the ambitiousness of its efforts, oil and gas production volumes for RDS.A dipped nearly 13% to hit only 2.9 million barrels of oil equivalent.
Overall, Royal Dutch Shell has struggled with U.S. shale (in the Eagle Ford, Mississippi Lime and Utica), has experienced huge cost overruns in its Australian LNG projects, has seen struggling production in offshore Brazil and has faced actual stolen oil from its facilities in Nigeria. Add this to its losses in its downstream segment — both in refining and marketing — and it’s easy to see why RDS.A is planning on huge asset sales in the near future. Those non-core sales are pegged to be in the $30 to $40 billion range — a nice boost for Royal Dutch Shell stock, but not an investment thesis.
Unfortunately for RDS.A stock, those non-core assets were the main attraction versus rivals. It’s willingness to spend some expensive dollars to try new things gave Royal Dutch Shell the edge. Not only in potential gains, but in the actual return department as well.
RDS.A stock managed to outperform XOM by roughly 45 percentage points over the last five years. While Shell’s higher dividend certainly helped, its profile as a more growth-oriented oil company was the main driver. Even more sinister is that Shell’s cash flows during the last year were less than the firm’s spending on CAPEX and dividends. While a dividend cut isn’t in order, slowing the pace of increases is totally reasonable.
And with the primary catalyst for higher returns now slowly being sold away due to poor performance, it’s anybody’s guess on just what Shell’s future returns will be. Considering that RDS.A stock has already underperformed the even more growth and shale-focused Energy Select SPDR ETF (XLE), I suspect meager and average gains going forward.
Given that its fizz may be gone, it might be time for investors to say goodbye to RDS.A stock and either buy the faster moving XLE or one of its smaller constituents-like EOG (EOG) or Pioneer Natural Resources (PXD).
Your portfolio might thank you.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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