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Royal Dutch Shell stock has fallen by over 26% in the last year

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By: MICHEAL KAUFMANPublished: Jun 10, 2015 

The stock for Royal Dutch Shell Plc. (ADR) (NYSE:RDS.A) has fallen by over 26% in the last one year. The S&P 500 during the same period rose by 6.71%. The decline in the stock prices of energy companies has been a norm. Over the last one year, crude oil prices have fallen more than 40% owing to an excess crude supply in the market. While the lower crude oil prices have bolstered the downstream business segment of oil companies, the upstream business segment has suffered immensely.

The US benchmark for crude oil, West Texas Intermediate (WTI) at 5:13 (AM) (EDT) was up 2.11% at $61.47 per barrel, while the global benchmark for crude oil, Brent was 1.66% up at $65.96 per barrel.

Other competitors of Shell suffered the same fate. Shares of BP Plc. (ADR) (NYSE:BP) fell by 20.19% in the last one year, while shares of Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) in the same period fell by 16.75% and 19.14% respectively.

Shares of the Shell closed down 0.54% at $58.01 on Tuesday. Shell’s market capitalization was $184.14 billion on the closing bell of the market on Tuesday.

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In a falling crude oil environment, oil companies are aiming to consolidate and diversifying their operations in order to benefit from lower average costs per unit. Shell in April finalized its merger deal with BG Group Plc. (ADR) (OTCMKTS:BRGYY) for $70 billion. The $70 billion price tag would imply a price of $20 per share with a 50% premium.

The deal would allow the company to diversify its operations and move out of the conventional crude oil and natural gas markets into the Liquefied Natural Gas (LNG) market. The deal, if successful and approved by the regulators, would allow Shell to establish itself as the world’s largest LNG producer.

Considering the massive size of the combined entity, the company is likely to undergo scrutiny over the deal. One of the hurdles that Shell is currently facing is scrutiny from China’s ministry of Commerce. (MOFCOM). In 2014, Shell along with BG commanded 20% of the global LNG market. The merger would further increase the dominance of the combined entity and pose problems for the country, which allocates a sizable portion of its import bills to LNG imports.

In other news, Shell in May was granted permission by the US President Barrack Obama for drilling in the Arctic. However, the company’s plans to drill in the Arctic may be in jeopardy as environmentalists led by Greenpeace are protesting over the decision.

The environmentalists feel that a proper analysis regarding drilling in the Arctic was not done; if Shell is allowed to drill in the region, it could prove to be detrimental for the environment. The rugged topography along with the severe weather conditions would pose significant challenges to Shell and may prove to be hazardous for the environment. Protests against the company in the recent week have also grown stronger.

Meanwhile, Shell believes that it has critically assessed the risks of operating in the Arctic. The area has around 28 billion barrels of recoverable oil and 128 trillion feet of natural gas reserves. With the decline in the prices, the Arctic could give Shell a good opportunity to increase its production and boost its profits, which at current crude oil levels could amount to $280 billion in the future.

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