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Shell: The Slumbering Giant

Thursday, January 31, 2013


Royal Dutch Shell RDSB.LN -2.88% isn’t an obvious candidate for sympathy. The oil and (increasingly) gas major raked in $26.6 billion last year, with Brent crude-oil prices averaging above $100 per barrel.

Yet Shell’s full-year earnings were 14% down on 2011 and missed consensus forecasts, while its oil output rose by just 1%.

The results capture Shell’s investment proposition perfectly: Its sheer scale and operational expertise mean shareholders can sleep easy, but they’re unlikely to dream big.

Shell hasn’t suffered the sudden cuts to production forecasts or geopolitical headaches of British peers BG Group BG.LN -1.75% or BP. The company is instead undergoing a long shift toward more natural-gas production, which now accounts for half of its output.

That looks a sensible strategy given long-term expectations for rising global gas demand. But similar to Exxon Mobil XOM -0.65% —still struggling to persuade shareholders of the wisdom of 2010’s XTO Energy acquisition—it is not without pain. Any major energy company interested in having a future beyond the next couple of years must participate in the U.S. shale revolution. But that same revolution is keeping gas prices low for now, causing Shell to make a loss on its U.S. upstream operations for the past two quarters. They also forced Shell to de-book reserves, keeping its replacement levels woefully low.

Shell’s problem is that there is always one Achilles heel dragging down results. This time last year problems in its refining business held back profits. Return on capital employed has averaged 10.6% since the start of 2009, compared with 20.5% from 2005 to 2008, based on Sanford C. Bernstein figures. Another issue is getting more of its capital actually producing: $65 billion worth of assets on its balance sheet are either currently still under development or idled because current returns are unattractive.

As it is, Shell’s capital expenditure bill is set to rise another 10% this year to a colossal $33 billion. The company expects all this spending will eventually mean production is 20% higher in 2017 than in 2012. To keep investors sweet while they wait, Shell has raised its dividend again. The stock now yields almost 5%, roughly in line with its peers.

Shell’s resources mean it can afford to do all this—that’s the comfort factor. But the stock’s total return over the past year of about 8% lags Exxon’s and isn’t much higher than BP’s. Shell’s talent for sending shareholders to sleep can’t be disputed. Waking up its own share price, not so much.

Write to Andrew Peaple at [email protected]

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