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Why Royal Dutch Shell plc (ADR) (RDS.A) Stock Is the Best Energy Choice

Like most energy stocks, integrated giant Royal Dutch Shell plc (ADR)’s (NYSE:RDS.A, RDS.B) latest earnings report was pretty boring. Energy prices were lower during the quarter. So naturally, RDS stock had its share of lower sequential profits. No surprise here. All in all, it was a pretty unexciting quarter.

Why Royal Dutch Shell plc (ADR) (RDS.A) Stock Is the Best Energy ChoiceYep. Shell’s report was full of the usual talk of future drilling prospects, cost cutting and focusing on coffee.

That’s right, Shell’s latest strategy for winning in the energy sector is selling a lot of coffee. And that might now be a bad thing indeed. For investors, it just goes to show how the downstream and marketing is driving a bigger portion of the energy pie.

Royal Dutch Shell Wins Big With Downstream

Taking a deep look at Shell’s recent earnings you’ll notice an interesting pattern. It’s the same pattern that has managed to save rivals like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) in recent quarters as well. And that’s downstream and refining has come to save the day. Oil prices have crashed and continued to stay “lower for longer,” the ability to use that cheap oil as a low price feedstock for refining has been a saving grace for RDS and its kin.

In fact, Shell stock managed to see a 39% year-over-year increase in profits at its downstream unit this quarter. Upstream and E&P profits were barely a blip.

What’s interesting isn’t just that chemicals and gasoline refining are driving the show, it’s what comes along with those sales. Namely, a hefty dose of cigarettes, hot dogs and soft drinks.

As oil has continued to be lower and hasn’t even begun to flirt with its former $100 per barrel highs, the energy industry isn’t what it used to be. And as the glut of oil and sequentially gasoline have now become the norm, consumers have been spending the difference. And increasingly that has meant heading to their local convenience store on their morning drives to work for a bagel and coffee.

For Shell stock, this actually been great news. Margins for a cup of coffee are substantially bigger than on a gallon of gas. And when you add in credit card processing fees and other costs, some small mom & pop convenience store operators actually make nothing on their gasoline sales. It’s all about selling you candy bars.

RDS has more 43,000 convenience stores in more than 80 countries. Bloomberg Gadfly’s Liam Denning points out that this is more locations than McDonald’s Corporation (NYSE:MCD) and Starbucks Corporation (NASDAQ:SBUX) combined.

Think about that. This is a huge opportunity for Shell versus some of its rivals. XOM sold its company owned stations back in 2008, while CVX only owns half as many service stations. And Shell makes a pretty penny from those retail locations — about $100,000 on average. This compares to about $120,000 to $130,000 for MCD’s and SBUX.

A Newfound Focus at RDS

Getting profits up at those retail locations is part of a wider-sweeping effort at Shell to plan for the low-carbon economy. Chief Executive Ben Van Beurden raised eyebrows when he said he supported recent efforts in Europe to ban diesel vehicles and that he wanted to buy an all-electric car. As a result, RDS has been makings serious efforts and planning for “very aggressive scenarios” where oil is no longer part of the picture.

Part of the shift has been a massive focus on natural gas production — for electricity demand — i.e., its massive BG Group purchase. The other has been a focus on higher-margined burgers, fries and mocha lattes from its convenience store network.

The idea of making a convenience store more of a shopping destination with food courts and other needs seems to be working. While Shell doesn’t break out details of its retail business, it does mention that it processes more than $6 billion in retail transactions last year and that the number has been growing.

For example, RDS underwent a huge overall of its stores in the United Kingdom starting in 2012. Since then, total sales in the U.K. have jumped 15%, while food sales have surged by more than 49%. Margins have improved by 19% in these locations as more “premium items” have been sold.

For RDS stock, this focus on retail sales is creating a “future proof business plan” in the age of low price oil and declining demand. It gives it a real edge over its rivals like XOM or CVX who don’t have the same sort of service/retail networks.

Buying RDS Stock for the Long-Term

In the end, the retail focus at RDS is a huge win for Shell and its investors. Already, downstream has been proving a big boost to the firm’s cash flows and earnings. As the sector continues to grapple with lower for longer energy prices and declining demand, burgers, coffee and Slim Jims will continue to be a lifesaver for RDS stock. For investors in the energy sector looking at the future, Shell’s plans are the only way to go.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/08/royal-dutch-shell-plc-adr-rds-a-stock-best-energy-choice/.

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