Why Royal Dutch Shell’s Fire Sale May be Cause for Concern
…both BP’s and ConocoPhillips’ asset sales look downright modest in comparison to the outright fire sale Royal Dutch Shell will soon embark on. Royal Dutch Shell unloaded billions last year, with even greater amounts to be sold off over the next two years. That’s why investors may have legitimate cause for concern about the fate of Shell’s future growth trajectory.
Royal Dutch Shell plans to sell off several billion dollars worth of assets over the next two years. Should investors be worried?
The last year was a tough one for integrated oil majors. Thinning refining margins put a serious dent in downstream earnings, and upstream profitability failed to impress despite cooperative energy prices. As a result, it’s not entirely surprising to see members of Big Oil such as BP (NYSE: BP) sell off non-critical assets.
Even independent exploration and production major ConocoPhillips(NYSE: COP), which isn’t nearly as integrated as its peers after spinning off its downstream and midstream business, got in on the asset sale game last year.
However, both BP’s and ConocoPhillips’ asset sales look downright modest in comparison to the outright fire sale Royal Dutch Shell(NYSE: RDS-B) will soon embark on. Royal Dutch Shell unloaded billions last year, with even greater amounts to be sold off over the next two years. That’s why investors may have legitimate cause for concern about the fate of Shell’s future growth trajectory.
These initiatives are what Shell management refers to as the “hard portfolio choices” necessary in light of its poor underlying performance in 2013.
Bob Ciura owns shares of BP p.l.c. (ADR). The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Is It Finally Time To Dump Royal Dutch Shell Stock?
By Aaron Levitt, InvestorPlace Contributor
Sometimes you just have to say goodbye to a stock, even when it has been good to you over the years. 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.
Shrinking Giants: Royal Dutch Shell long list of abandoned projects
A total of $15 billion worth of assets are expected to be sold this year and next, including petrol stations in Australia, offshore production capacity shares in Brazil, pipelines and a host of other assets (link). Problem is that many of the projects were meant to boost production both upstream and downstream, which means that most likely Shell will not be able to stem a steady long-term production decline.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
While in 2012 total production of oil and gas increased by about 47,000 barrels of oil equivalent, it seems that Shell production declined for 2013 by 1.8% compared to 2012 and fourth quarter decline was 4.7%, compared to the fourth quarter of 2012. This decline will probably continue into 2014 and perhaps beyond as Shell actually tries to divest from many projects which were hoped to bring more production online (link).
Long list of abandoned projects:
Oil shale also known as kerogen deposits always captured the imagination and fascination of many people, due mainly to the huge size of the deposits found mainly in the United States. Royal Dutch Shell was among the many companies which figured that being the first to unlock the potential of hundreds of billions, or even trillions of barrels of oil found within the deposits would be a huge competitive advantage over competition as well as a way to make up for dwindling opportunities in more conventional fields. After many years of conducting pilot projects in the field, they quit last year (link).
The over 100,000 acres Shell acquired in 2010 in the Eagle Ford field went up for sale last year, as the returns on the investment proved to be disappointing (link). In the second quarter of 2013, Shell reported a write-down of $2 billion on liquids rich shale operations. At the time, there was little detail given in regards to the specific reason why it was deemed necessary and which operation was responsible. I pointed out then in an article (link) that it was probably the Dimmit County property which a USGS study in 2012 found to be a region with comparatively poor per-well production results in the Eagle Ford. As it turns out, it seems the 2012 USGS report has some relevance in giving us some indication in terms of what to expect in terms of returns on investments.
The Proposed Gas to Liquids (GTL) plant in Louisiana never got off the ground as Shell decided to axe the project on concerns of the future of natural gas prices. The plant was going to produce over 100,000 barrels of GTL diesel fuel per day at a capacity cost of about $100,000 per barrel per day. Given that feasibility of the project was seen only as long as crude oil stays above $100 a barrel and natural gas at under $6 per million BTUs, Shell decided it is too risky (link1, link2).
Exploration in Alaska was abandoned early this year for the remainder of 2014. The company’s new CEO Ben van Beurden cited during the Q4 presentation a court decision which found that the exploration permit to Shell was awarded by the Interior Department based on inadequate information. Truth is however that after years of exploration and $5 billion spent, Shell found out that operating in the arctic was expensive and technically challenging. It is possible that the decision to suspend operations will be permanent.
These are just a few examples of Royal Dutch Shell divesting itself from various projects upstream and downstream. A total of $15 billion worth of assets are expected to be sold this year and next, including petrol stations in Australia, offshore production capacity shares in Brazil, pipelines and a host of other assets (link). It is all part of trying to keep its net capex spending down, which last year came in at $44.3 billion. Problem is that many of the projects were meant to boost production both upstream and downstream, which means that most likely Shell will not be able to stem a steady long-term production decline.
Price-rigging probes jammed by oil industry bid to protect its secrets
The case alleges collusion to manipulate spot prices among Shell, BP, Statoil, Morgan Stanley, Vitol, the Dutch trading giant Trafigura Beheer BV and others since 2002…
Joel Kirkland, E&E reporter:
A U.S. investigation into whether the world’s biggest crude oil traders fix prices has sparked an escalating and high-stakes court battle over the disclosure of records.
Royal Dutch Shell PLC, Vitol Group and Plains All American Pipeline LP have joined Morgan Stanley in a federal court case that aims to stop mounds of trading data given to U.S. regulators from being used in civil cases alleging market manipulation by a trading house controlled by Norwegian shipping magnate John Fredriksen.
“By providing false and inaccurate information and engaging in false or sham trading, defendants undermined the entire pricing structure for the Brent crude oil physical and futures markets,” claims an Oct. 4, 2013, class-action suit filed in a U.S. district court in Manhattan.
The case alleges collusion to manipulate spot prices among Shell, BP, Statoil, Morgan Stanley, Vitol, the Dutch trading giant Trafigura Beheer BV and others since 2002, a period during which physical and financial oil trading shifted into high gear.
The TRUTH will set you FREE.
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