Royal Dutch Shell (NYSE:RDS.A) is an oil and gas company that operates through three different segments: Upstream, Downstream and Corporate. Upstream is engaged is finding the raw materials that Shell extracts, Downstream manufactures, distributes and markets the products. Corporate comprises the key support functions. It is the fifth-largest company in the world and one of the six oil and gas supermajors. It is also the second-largest company by revenue, just $16 billion behind Exxon Mobil (NYSE:XOM). Its main competitors include Exxon, TOTAL (NYSE:TOT), Petrobras Argentina (NYSE:PZE), and Statoil (NYSE:STO).
At the end of 2011, Shell reported annual revenue of $470.141 billion, operating income of $55.660 billion, and net income of $31.185 billion. It has total assets of $345.257 billion, and total equity of $169.517 billion. Its current price per share is $63.22, and it has a market capitalization of $200.70 billion.
Royal Dutch Shell's quarterly results were stellar. It reported a year-over-year increase of 16% in adjusted earnings to $7.3 billion. This was above the expected increase in earnings. It was particularly strong due to higher oil and gas prices across the company and stronger levels of production. Oil and gas production was up 1.4% year over year while oil and gas prices were 15% higher. Upstream's earnings was up 35% off Shell's integrated gas operations, which grew by 125%. Downstream's earnings suffered an expected 32% loss over Shell divesting itself of some of its portfolio and off falling margins.
Liquefied natural gas is incredibly important to Shell's future. Integrated gas, which is mostly comprised of LNG, made up 39% of Upstream's profits last quarter and grew by 125% last quarter. Shell is one of the world leaders in the LNG market and is looking into ways to expand its access to LNG in Africa, the Middle East, and Asia. Its exploration efforts so far have yielded a great deal of success, uncovering valuable areas of natural gas in the Gulf of Mexico and off the coast of Qatar among other sites.
Along with this, Shell is also trying to turn Downstream back to profitability. It is restructuring the segment, and trying to reduce labor and capital costs. This will help it improve its margins and provide higher returns to shareholders in the coming years.
Shell does have a couple of problems that it will find hard to deal with over the coming years. As it shifts to LNG, it is losing some of its more lucrative oil resources, which will undoubtedly hurt its profitability in the short term as it completes the transition. However, this is an important move by Shell as it is putting the future and long-term growth before the present and short-term growth.
Shell might also find it difficult to secure rights to extract natural gas and oil from many of the countries that have the richest deposits. Shell is very exposed to governments that are very unstable and can easily change their minds. It has to deal with these people as they control almost everything it extracts. This puts Shell in a very difficult position where it is hard to increase production especially as many of these countries prefer domestic companies to foreigners. However, Shell has positioned itself well with its exploration division constantly turning up results. This will allow Shell in the future to move away from having to deal with these governments, especially now that it is becoming more reliant on natural gas and less so on oil.
Morningstar rates Royal Dutch Shell's fair value at $79.00 per share, and recommends buying at $63.20. It also gives it a 5-star rating. The Motley Fool gives it a 4-star rating and almost everyone on The Fool who follow the stock believe Shell will outperform the market. Consequently, at $63.22 per share, I believe Shell is a solid buy, however, I invite you to draw your own conclusions from my analysis.
All my data is from morningstar.com, unless otherwise stated. Please feel free to inform me if I have missed out anything from my analysis and I will be more than happy to update it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.