Shell share price: Company’s problems extend beyond oil prices, analyst says

Big bets on shale “destroyed huge amounts of capital” and the company has few growth assets…the firm is far more likely to remain a laggard than become a leader among the oil majors for the rest of this decade…

by Veselin Valchev: Tuesday, 27 Oct 2015

Royal Dutch Shell Plc (LON:RDSA) carries hefty baggage and even if oil prices were to recover back to $100 per barrel, it would not solve all the firm’s problems, argued senior Morningstar analyst Stephen Simko.

Big bets on shale “destroyed huge amounts of capital” and the company has few growth assets, Simko said.

The notable exception is the potential addition of BG Group’s Brazilian operations, should the proposed merger complete successfully. BG’s interests in the Santos Basin are estimated to hold more than three billion barrels of recoverable oil resources and are projected to break even at only $30-35 per barrel.

Brazil has already cleared the tie-up, but the deal is facing stiffer opposition from authorities in Australia and China.

However, even BG’s Brazil position is not without its risks, as the operator of the field is Petrobras, which faces a myriad of issues on its own.

In general, Shell “will struggle mightily” to overcome the issues ranging from the slump in oil prices, to poorly performing downstream and few good growth options, Simko said.

“Investors should not expect miracles; Shell isn’t Exxon or Chevron and probably never will be,” Simko wrote yesterday. “Improvements are indeed likely, but the firm is far more likely to remain a laggard than become a leader among the oil majors for the rest of this decade.”

In contrast, RBC analysts sounded an optimistic vibe earlier this week, noting that with a fresh set of modest cuts to capital spending, Shell would be well geared for a prolonged period of depressed oil prices.

“On our numbers, at $50-a-barrel oil and a further 10 percent reduction to capex, Shell will add 3 percent to its [debt] gearing each year,” RBC analysts said. “We see ample room to weather the storm.”

Simko’s comments come just two days before Shell is due to report quarterly results for the three months ended September 30. The firm is expected to post a 55 percent drop in quarterly earnings to £2.65 billion. High interest will be drawn to charge relating to the company’s exit from its Arctic exploration bid. Shell said last month that its position is worth $3 billion, while it also has about $1.1 billion in “future contractual commitments”. To date, the company has spent about $7 billion on its Arctic ambitions.

Shell’s share price had dipped 1.18 percent to 1,721.50p as of 10:26 BST today, in line with the wider energy sector.

Meanwhile, Shell’s top UK oil rival BP reported its own Q3 results today. The company posted a 48 percent drop in replacement cost profit to $1.23 billion, which was above analysts’ consensus. BP’s share price has edged more than one percent higher today.

As of 10:56 GMT, Tuesday, 27 October, Royal Dutch Shell Plc ‘A’ share price is 1,720.00p.

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