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Royal Dutch Shell Is Making The Right Moves At The Right Time


  • Shell declared an income of $13.4 billion compared to $4.8 billion in 2016.
  • Merger with BG was a game-changer for Shell.
  • Shell has now positioned itself as an energy company that is ready to embrace new challenges.

Headquartered in the Hague, Netherlands, Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) has established itself as one of the most prominent oil and gas companies in the world. Although the last few years have been tough for the energy giant, Royal Dutch Shell has now started making the right moves, which will reap benefits in near future.

In its recently published Annual report for 2017, Shell declared an income of $13.4 billion compared to $4.8 billion in 2016. Although it must be noted that high oil and natural gas prices contributed to this yearly gain, a year-on-year increase of 279% is commendable.

Even the company’s earnings witnessed a staggering year-on-year growth. The total segment earnings in 2017 stood at $12,471 million as compared to $3,692 million in 2016. With strong earnings growth and a P/E ratio of around 19.89, Royal Dutch Shell holds tremendous potential for long-term energy investors. And with oil prices looking to remain in the range of $60-$70 a barrel this year, earnings are bound to increase further in 2018.

Merger with BG Group was a game-changer

In April 7, 2015, Royal Dutch Shell proposed to merge with BG Group, a move that would make Shell the largest liquefied natural gas producer in the world. Although this deal (which finally went through in 2016) was considered to be way too expensive by many industry insiders (because of the low oil price environment of 2016), it became a game-changer for Shell.

The energy giant now owns an “Integrated Gas Division,” which was further split into two parts: Integrated Gas and New Energies. Integrated Gas consists of LNG activities and natural gas exploration/extraction, while New Energies consists of emerging opportunities in electric vehicles, advanced bio-fuels, solar power, wind power, and natural gas.

This move opened new opportunities for Shell in Asia, as it could finally tap the rising potential of energy giants India and China. Both India and China have great potential as far as LNG is concerned, and Shell now possesses the world’s largest LNG fleet.

For its New Energies business, Shell has made some acquisitions, like Netherlands-based New Motion, a company that has the biggest network of EV charging points in Europe. Company shair Charles O Holliday said:

As a part of our drive to help power progress with more and cleaner energy solutions, we will offer customer more low carbon products and services, such as low carbon fuels for drivers and low carbon energy for homes and businesses. Expanding our power supply business, including investments in electric vehicle charging systems, will help us to deliver cleaner energy while other parts of our business work to meet rising global demand for key products such as natural gas , the cleanest burning hydrocarbon.

With its New Energies business, Shell is trying to diversify its energy business and hedge risk by investing in clean energy, something few energy companies have done to date. Investors must take note of this.

Other major successes

Apart from a strong financial performance in 2017 and diversifying its business assets, Shell has achieved major success in Brazil, where it has been present for almost 30 years. With its partner Petrobras, Shell has begun production in Lula South Deep-water production through FPSO P-66, which can process around 150,000 barrels of oil per day.

In Nigeria, the company has started production at Phase 2 of Gbaran-Ubie integrated oil and gas development with peak production of 175,000 barrels per day. Besides this, in January 2018, Royal Dutch Shell announced one of its largest exploration finds in US Gulf of Mexico from Whale deep-water well.

Investor Takeaway

Image source: 2017 Shell annual report.

By approaching a low-carbon future through its New Energies division and signing a number of new contracts, Shell has positioned itself as a company ready to embrace new challenges in the current market condition. Royal Dutch Shell has improved its year-on-year cash flows by reducing its operating costs along with capital investments, and is surely headed in the right direction, in my opinion.

Royal Dutch Shell stock was trading at $62.17 at the time of writing this article, having witnessed solid growth in the last year. In my opinion, it is a must-buy for energy investors with a time horizon of 5 to 10 years. Based on its 2017 financial performance and current market conditions, I expect this stock to touch $68 by year end.

Disclosure: I/we 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.

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