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.)
Your complete guide to energy investing, from growth stocks to high-yielders.
In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Jul. 29, 2021
Balanced portfolios of energy stocks for aggressive and conservative investors.
Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.
Our assessment of every energy-related master limited partnership.
Roger Conrad’s coverage of more than 70 dividend-paying energy names.