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  • Roger S. Conrad

Big Oil: Picks and Pans

By Roger S. Conrad on Sep. 30, 2014

Royal Dutch Shell (LSE: RDSA, RDSB; NYSE: RDS A, RDS B)

RDS A Price Graph

Royal Dutch Shell’s history of poor capital allocation and execution has weighed heavily on the stock and explains why the firm has opted to monetize its North American midstream assets with the forthcoming initial public offering of Shell Midstream Partners.

This proposed transaction will help the company to achieve a higher valuation multiple for this extensive asset base while providing the firm with a source of low-cost capital.

Although we applaud this strategic move, Royal Dutch Shell faces an uphill battle to correct decades of missteps. The company has plowed huge sums into exploration and development, but these investments have failed to stabilize production or generate a reasonable return on capital.

Royal Dutch Shell also continues to divest noncore assets in an effort to focus on projects that offer the best potential returns.

But the company’s long-running headachea looks set to continue, thanks to sanctions affecting its Russian ventures, security issues in Nigeria that have led to frequent disruptions and uncertainty surrounding its exploratory efforts in the Arctic.

All told, Royal Dutch Shell appears unlikely to grow its production and reserves in the near future, especially with management scaling back capital spending and selling assets to preserve capital.

We rate Royal Dutch Shell a hold for investors who already own the stock. Shell Midstream Partners, on the other hand, will be a solid buy for investors and should generate outsized returns. (See Three Forthcoming MLP IPOs to Buy.)

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor