There's bombshell value in Royal Dutch Shell
While Shell's 31 percent profit decline might have been seen as a 'bombshell,' these shares still offer plenty of value and safety at current levels.
By Richard Saintvilus
With less-than-glowing results coming in from Chevron (CVX) and Exxon Mobil (XOM), I don't believe the Street expected an energetic quarter out of Royal Dutch Shell (RDS-A), which has struggled over the past couple of quarters to meet its oil and gas production targets. But investors didn't expect a fifth of Shell's earnings to be wiped out due to (among other things) a significant write-down on the value of its North American shale assets.
While Shell is not alone in its output challenges, unlike Exxon and Chevron, Shell is the only one among the oil majors to reduce its previously-issued output guidance. On the announcement, Shell, whose stock trades in two separate classes (RDS-A and RDS-B), fell 5 percent. And with the poor results coming in out of North America, which is not expected to produce any returns for the rest of the year and possibly next, it doesn't seem as if management's multibillion-dollar bet on U.S. shale will pay off any time soon. But I don't believe it's time for panic, either.
While Shell's profits did decline 31 percent this quarter, it's worth noting here that both Exxon and Chevron, which occupy the top two spots among the energy majors in terms of size, also posted profit declines. Not to make light of Shell's dismal performance, but rivals like BP (BP) and Total (TOT) didn't fare any better with profit declines of 26 percent and 20 percent, respectively. So it's hard to look at Shell's results and not appreciate that it might just be an industry trend.
As with Exxon and Chevron, rising costs and exploration charges, which are standard occurrences in this sector, significantly impacted Shell's bottom line. Not to mention, things like currency exchange rates and Shell's on-going security-related challenges in Nigeria, where a blockage impacted profits by $300 million.
What's more, the fact that refiners like Valero (VLO) continue to struggle with throughput and weak volumes, it also came as no surprise that Shell struggled here as well. Not to mention, Chevron posted a 45 percent year-over-year decline in refining profits.
In fact, I don't believe there's been an oil major that has not cited global refining overcapacity and weak demand, including Exxon, which posted an 81 percent decline in refining and marketing profits. Total, meanwhile, saw a 42 percent year-over-year drop. Yet, the Street was somehow caught off guard by Shell's weak refining results, whereas it is clearly an industry-wide trend. To some extent, that's where the similarities ended.
Unlike Chevron and Exxon, which posted year-over-year production growth of 1.5 and 3 percent, respectively, Shell's combined oil and gas production declined 2 percent year-over-year. Again, this is where struggles in Nigeria, which adversely impacted volumes by 100,000 barrels per day, took its toll. Management believes its needs to spend more to get production back on the uptrend. The Street wasn't too happy this. But I don't see another way around it.
Investors want both growth and strict cost-controls. This is impossible to achieve -- at least not at the same time. As with Exxon and Chevron, which have increased their spending on growth projects, Shell management said it will increase capital spending by 50 percent, which is 13 percent more than prior guidance.
To that end, while I do understand the anxieties caused by what seems as a lack of fiscal awareness, I also understand that growth and profitability are virtually impossible without ongoing capital investments, especially in this sector where exploration is the lifeblood of the business. It's also worth noting that management said it plans to begin several new projects over the next year-and-a-half that should generate $4 billion in cash flow in 2015.
With that in mind, I like the company's prospects. And if the management can achieve $4 billion in cash flow in the next two years, this should be more than enough to fund not only these near-term capital expenses, but also dividends. While Shell's 31 percent profit decline might have been seen as a "bombshell," these shares still offer plenty of value and safety at current levels.
At the time of publication, the author held no position in any of the stocks mentioned.
More from TheStreet.com
- Cramer: Bad-news banks; oil stocks getting killed
- HP’s death is not greatly exaggerated
- Pandora could become a $100 stock
RDS has a nice dividend, too
if you like this don't buy RDS.A in the US, buy RDS.B
QUOTE: " I don't believe the Street expected "
Too many expressing their BELIEFS on these forums! Please limit your expressions to FACTual ones. Otherwise it's just so much 'touting.'
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
These companies won't soar like other plays in the sector, but they make for great income sources.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.