Royal Dutch Shell: The World Has Fundamentally Changed

Summary

• Betting on oil companies is betting on the price of oil, and this is a thesis for higher oil prices long term.
• Management remain competent and have done the right thing by focusing on cash flow conservation during these uncertain times.
• Shell is continuing to look beyond oil, and into the shape of the energy sector decades down the line, and this has huge potential for long-term upside.

Dividends

"The world has fundamentally changed" was the opening line of CEO Ben van Beurden this morning before he went on to "rebase" (read: cut) the Royal Dutch Shell (RDS.A) dividend from $0.47 to $0.16 cents per share, a 66% reduction. This led to stock price declines of circa 7% on the announcement and falling further since, for those interested my own purchase price is £11.99 per share of (RDS.B) for my personal portfolio on the 1st of May.

Just a quick note on both share classes, as a UK based investor I bought the B shares as they are listed in London. This allowed me to avoid the 15% tax on dividends I would have paid if I had purchased the A shares, which are based in the Netherlands.

Getting back to the dividends, as an investor I care not about how much capital is retained vs. paid out back to shareholders but about the value created with each dollar. Broadly speaking, capital is only paid out to investors when the management feel we (the investors) are better equipped to put that money to work than they are. In the case of RDS, they need the dollars to thrive (or perhaps that should read survive) more than we do right now.

Source: (Royal Dutch Shell, 2020)

Overall, my feeling is this is a relatively conservative approach and done so in anticipation of worsening conditions through the next quarter, as oil prices remain heavily depressed. In my opinion it is also a sign of a clued up and competent management, that understand while making a (small) quarterly loss, dividends would be paid out via debt. This would hardly be a sensible move given the current macro-economic climate we are in, especially with regards to oil pricing at the time of writing.

Truth be told, dividend investors should be thankful for any dividend at all given current circumstances. Bolstering cash on hand and strengthening the balance sheet (which in fairness, remains relatively strong) should absolutely be the priority moving into the next quarter, which will be akin to a bloodbath compared to today's results.

For a little further context, at the time of writing 41 companies in the FTSE 100 (so 41%) have either materially reduced or altogether cancelled dividends, as they seek to strengthen balance sheets in anticipation of risks and further uncertainty felt globally due to COVID-19.

Now that the headline of the day has been discussed, let's move on to mid to long-term opportunities.

Opportunities Ahead

Oil Is Fundamentally Cyclical

As the graph below illustrates, the price of oil experiences significant volatility decade to decade for a wide-ranging number of reasons outside the scope of this report. The two reasons I do want to talk about today are the disruption on the demand side caused by COVID-19, and the increase on the supply side led primarily by geo-politics between Saudi Arabia and Russia.

However, a few caveats on the graph below. This is a circa 70-year graph on West Texas Intermediate prices, which remains discounted compared to its primary counterpart, that is Brent Crude, which is primarily sourced from the North Sea. Brent oil is currently trading at $25.30 a barrel compared to WTI at $17.48, a fairly substantial divergence. Furthermore, it is worth noting the above graph accounts for inflation and is based on CPI, helping paint a more accurate long-term picture.

Source: (MacroTrends, 2020)

With oil prices at historic lows, the only way is up from here when looking further out into 2020 and beyond. As the table below illustrates, futures prices for WTI expect oil to rise to circa $30 a barrel by December, which will bring most European oil majors relatively close to (or indeed at) a profitable price point.

Source: (CME Group, 2020)

BP (BP) recently announced it would be profitable and able to cover dividends at circa $35 per barrel and it is reasonable to assume other oil majors are taking similar steps during these uncertain times. This is done through extensive cost cutting measures and a re-thinking of capex moving forward, including the avoidance of sites (perhaps offshore) where production costs are higher (Reuters, 2020).

However, long-term prices will undoubtedly rise well above $35 and hit $60 globally at some point within the next ten years. As long as profitability can be maintained around $30, there is scope for substantial margins with mid to long-term horizons in mind.

Source: (Royal Dutch Shell Investor Presentation, 2020)

As the slide above points out, investment decisions through 2019 took a Final Investment Decision (FID) on the viability of new sites at below $30 a barrel. This provides some optimism that even during heavily depressed times of oil pricing, Shell can both survive and remain profitable should this happen again, at least across a substantial part of its portfolio.

It is also worth pointing out the extreme volatility in short-term prices in recent months. As the table below illustrates, both WTI and Brent futures are seeing almost daily double-digit changes in price movements. This is primarily caused by uncertainty in terms of storage space, which is now reaching capacity and relatively muted progress by OPEC and OPEC+ in terms of production cuts.

Source: (BBC Market Data, 2020)

That said, US shale oil and gas is likely to be adversely affected moving through 2020 due to its substantially higher costs of production. Therefore, this should provide some supply side relief as market forces (specifically pricing) become felt, and this will be especially prevalent amongst smaller shale producers who will find it tough to weather out this particular storm. In my opinion, bankruptcies among such producers will rise exponentially through the second half of 2020.

Finally, there is some good news in terms of replacement activities, with the Harvard Business Review noting that by 2027 circa 40% of current oil and gas production capacity will need to be replaced. This in theory will allow the global industry to simply lower capex modestly (which many oil majors are currently doing), and allow prices to creep higher (geo-political caveats aside) over the next few years.

RDS Remains Under Competent Leadership

Ben van Beurden took over as CEO of RDS in 2014 and has been with RDS for 30+ years. His experience ranges from all segments of the business, both upstream and downstream giving him a deep and perhaps unique understanding of core processes and forces across the firm. Since 2014 he has transformed safety within the group in terms of accidents and spillage and continues to push forward an agenda into both renewables and utilities via green technologies and First Utility respectively. Corporate social responsibility remains a key pillar of his leadership approach moving forward, and this process is likely a net positive with mid to long-term horizons in mind.

Perhaps the biggest testament to Beurden's success can be measured in total returns, which have beaten other oil majors across the world by 39% in the last 10 years, as reported by the FT this January (Financial Times, 2020). On the negative side, share buybacks in hindsight look to be very badly timed. This commended with the announcement of a $25 billion share buyback program on July 26, 2018 but is now discontinued as of the 23rd of March due to macro conditions and uncertainly caused by COVID-19. However, this program is set to continue post crisis, but management indicate this is unlikely to happen by the end of 2020 (Royal Dutch Shell, 2020).

Overall, I am willing to accept the timing of buybacks as being more to do with bad luck than an attempt by management to inflate EPS, hit targets for options bonuses or other somewhat nefarious agendas managements sometimes pursue.

Green Tech Is The Future (For The Most Part)

The world fundamentally requires energy companies to move away from activities that generate high levels of co2 by the latter half of this century. This remains especially true of the oil and gas sector, where the production and use of oil and gas accounts for over half of global greenhouse gas emissions associated with energy consumption. Overall, energy consumption itself generates circa 65% of emissions globally (CDP, 2020).

Source: (Royal Dutch Shell Investor Presentation, 2020)

Shell has two primarily levers to leverage to meet its 2050 target of net zero emissions and they are as follows: Bio Fuels & Biomass

The chart below indicates a possible scenario for net zero emissions by 2050 and beyond and shows biofuels and biomass playing a substantial role alongside other renewables. In this light, by developing experience and expertise now and slowly building biofuel and biomass capacity, Shell will be sufficiently prepared for this transitional phase of the energy mix moving forward.

Starting to scale up now will provide a few advantages, firstly is cost as additional ubiquity tends to provide more effective cost reduction solutions as understanding and expertise is further leveraged. Economies of scale may also play into this as generally the more of something that gets built, the more cost effective it becomes. This is known as the learning curve.

For the Paris climate agreement to be met, governments around the world may offer tax breaks or other subsidies to help promote this shift by major oil players away from traditional oil and gas. Pioneering this technology today will help Shell be first in line for such incentives when governments decide to act. Overall, while this is a relatively small part of Shell's portfolio today, the research and development of these technologies now will stand it in good stead well into the future. In my opinion it is worthwhile expenditure, and costs little relative to Shell's size and scope.

Source: (Royal Dutch Shell Sustainability Report, 2020)

Hydrogen

As the infographic below illustrates, Shell is expanding its footprint of hydrogen-based fueling stations across North America and Europe as it trials these technologies in conjunction with Daimler (DDAIF) and Toyota (TM).

Source: (Royal Dutch Shell, 2020)

As transportation accounts for the bulk of emissions, with cars alone generating 9% of global emissions accord to Green Peace, hydrogen may provide a vital alternative to diesel and gasoline. This is perhaps especially prominent in long distance travel and trucking, where battery technology is as of yet still getting to grips with 200-300+ mile journeys, and where solutions do exist, recharging times remain stubbornly high compared to fossil fuel or hydrogen-based alternatives.

While on paper hydrogen is theoretically cheaper than fossil fuels, in practice the cost per mile is generally higher. In the UK this breaks down to circa £11.40 per 100km versus £6.72 per 100km for a diesel based vehicle (Sussex Express, 2020).

Solar & Renewables

Renewables, especially solar power, is projected to rise substantially over the next few decades primarily because of this:

Firstly, the undeniable trend that it is getting cheaper over time, and secondly that efficient costs of production per KW is driving further popularity. It is in essence becoming a self-reinforcing process. Historically, we can look as far back as 1958 where the Vanguard 1 satellite used six solar panels at a cost of $5,00-$10,000 for circa half a watt of generation.

Moving forward to the mid-1970s and this was reduced to circa $100 per watt. This fell further still and by 2016 the cost was circa $0.50 per watt of electricity generated, and this trend shows no sign of slowing down (IRENA, 2020).

Admittedly, the price per watt today varies depending on the part of the world you live in, and it will be increasingly economically attractive to do it in some parts of the globe compared to others. One particularly prominent example of this was during 2016 in Nevada, where several major casinos transitioned to renewable energy sources instead of using state utilities. This was not done on the basis of corporate social responsibility or as a marketing exercise, but as a way to reduce costs. This held up as economical despite a circa $150m severance fee paid to the utility suppliers (BBC, 2019).

Getting back to Shell, they are somewhat lagging behind counterpart BP in terms of developing a solar based portfolio. Yet based on Shell's own predictions, it is highly likely they will invest substantial capex spend into solar based projects moving forward. It remains a key growth area for the group as traditional oil and gas segments flatline in favor of new, cleaner technologies to meet long-term worldwide energy demand.

Utilities

Source: (Shell Energy, 2020)

It is worth briefly touching on Shell's continued operations in the utilities business, which has recently been relabeled and rebranded as Shell Energy. This utility arm of the group operates primarily in the UK and at present offers 100% renewables-based energy supply to its customers. As the largest challenger utility firm in the British market, it remains an interesting segment to watch, and should the model prove profitable it is likely to expand further across the European continent. Unfortunately, no financial metrics are provided for the segment and it is unlikely investors will get such information anytime soon.

However, it is an indication of the firm's interest in the utilities market, and specifically in utilizing 100% renewable energy for household retail customers.

Headwinds

Two Black-Swan Events

RDS faces two once in a decade crisis or Black Swan events simultaneously. This comes in the form of geo-political maneuvering by major oil producing countries Saudi Arabia and Russia. Compounding this problem further is the sharp and unexpected collapse on the demand side caused by COVID-19. This section of the report will explore these two major headwinds facing oil majors across the world today.

Geo-Political Pressure: The Race to Pump Black Gold

Just two months ago in March 2020, Saudi Arabia embarked on its path of increasing oil production with no mind or heed to current worldwide demand, and this has thus far had terrible consequences. On the 3rd of January WTI futures traded at $63.05 per barrel, a relatively stable and normalized price over the last few decades, two months later on the 3rd of March it fell to $47.18, still within acceptable boundaries for oil majors to remain profitable and stable.

One month on at the 1st of April prices sunk to $20.31 per barrel before rebounding by the 3rd to $28.34 with many speculators deeming the bottom had been found. It had not, falling as low as $11.57 on some 17 days later and trading at a once in a lifetime price of -$37.63 as the expiration of April futures approached. This was because holders of futures dumped their contracts to avoid having to take physical delivery of the underlying asset, this black gold.

Commentary of the last few months aside, economic reality is now hitting Saudi Arabia full force. The nation's deficit has soared, with Reuters reporting late last month that: "The kingdom slipped into a $9 billion budget deficit in the first quarter as oil revenues collapsed" (Reuters, 2020). I'm focusing on Saudi Arabia here because they are A) the second largest producer in the world, and B) the lack of diversification within their economy means they are exposed and vulnerable to price shocks such as this.

However, it is this same vulnerability that will sooner or later force their hand in cutting supply dramatically as a means to survival, and to avoid the hardships of severe austerity and economic collapse. For this reason alone, I believe oil prices will eventually rise and find a stable equilibrium in a post-COVID-19 world. What I do not know is when this will happen, it may be months, it will probably be years.

Source: (Royal Dutch Shell, 2020)

Demand Side Collapse: COVID-19 Hits Hard

The second piece of this jigsaw was the sudden collapse on the demand side as supply pushed ever higher, creating the perfect storm. This goes against the basic fundamentals of supply/demand economics, and the consequences we have seen over the last few months will undoubtedly prove to be an excellent case study in years to come.

This collapse in demand has primarily been caused by the lockdown measures undertaken by governments worldwide in response to the COVID-19 pandemic, and specifically within transportation. As the image below illustrates, air travel, especially across Europe has practically ceased to exist. IATA reports the combined loss to the industry to be circa $314bn (IATA, 2020) as airlines cut as much as 90% of total capacity, materially reducing the need for its single largest variable cost, aviation fuel.

Source: (Business Insider, 2020)

This has extended to other modes of transportation as well, from cars and buses to trains and boats as restrictions are broadly expected to last throughout May. The chart below shows roughly how 25% of the world's oil supply is used:

Source: (Maritime Executive, 2020)

Clearly the short-term supply side of oil is getting crippled right now, and the headwinds are both material and extremely damaging in the short term. However, the long-term need for transportation will recover, and the lower equity prices seen in oil majors today do indicate, on balance, a good entry point into oil equities for investors with multi-year time horizons on which to capitalize on this short-term shock.

Financial Analysis

The next quarter will be particularly painful, that much is not up for debate. If the average price per barrel sold falls to $30 from this quarter's $50, that implies a hit on revenues of circa 40%, hedging caveats aside.

The model for discounted net income below is based on quite an extreme worst-case scenario. This includes a 40% reduction in revenues for FY 2020, tanking profitability to a loss of circa $10bn while hypothesizing a slow and painful recovery. The model below assumes revenues to not fully recover from 2019 levels until 2022 and profitability not to recover until circa 2025-26. It must be stressed that this is quite a dire expectation, and the recovery is likely to be hastened compared to the model below.

	2020	2021	2022	2023	2024
Revenues	$216.00	$259.20	$311.04	$332.81	$356.11
Operating Profits	-$10.23	$4.54	$15.84	$16.95	$18.14
Tax at 32.9%	$0.00	$1.49	$5.21	$5.58	$5.97
Actualized Cash Flow	-$10.23	$3.05	$10.63	$11.37	$12.17
Discounted Cash Flow	-$10.23	$2.99	$10.32	$10.93	$11.58

Click to enlarge

	2025	2026	2027	2028	2029
Revenues	$381.04	$407.71	$436.25	$466.79	$499.46
Operating Profits	$19.40	$20.76	$22.22	$23.77	$25.44
Tax at 32.9%	$6.38	$6.83	$7.31	$7.82	$8.37
Actualized Cash Flow	$13.02	$13.93	$14.91	$15.95	$17.07
Discounted Cash Flow	$12.27	$12.99	$13.77	$14.58	$15.45

Click to enlarge

10 Year Present Value	$94.64bn
Assumptions:
Discount Rate	1%
Growth Rate	7%
Tax Rate	33%

Click to enlarge

However, should this model stand the test of time, overall decade long expectations remain reasonably attractive to investors today. With value generation beyond 7% per annum, and strong dividend growth expectations in the second half of this decade, long-term prospects for RDS remain intact at current prices.

Levers are currently being pulled across the group, from discretionary spending to a slowdown in the hiring of new recruits. Capex is being reduced while FIDs are being granted exclusively to projects profitable at circa $30 per barrel. This has both short-term and long-term implications.

Firstly, free cash flow is being made available to support the balance sheet short term, and to allow RDS to maintain its coveted AA credit rating. This allows it to undertake and maintain attractive financing and keeps interest costs at a minimum. Secondly, having an increasingly large asset base capable of profitability at circa $30 per barrel means profitability is likely to soar should we see oil trade at its longer-term averages of $30-$60 per barrel. Indeed, $60 per barrel prices half a decade from now would see RDS shine, with annual profitability in all likelihood setting new records and its stock price with it. How likely it is we will see such prices this decade is, however, still up for debate.

Conclusion

As Buffett pointed out while talking about Occidental (OXY) over the weekend at Berkshire's annual meeting, betting on oil companies is essentially betting on the future price of oil. As the price of oil rises, so too will the oil majors who produce it. While I firmly believe that oil will hit $40+ per barrel, it is worth noting that this may take years to happen. It is unlikely we will see oil at these levels over the next 12 to 24 months and so this remains a long-term play and a bet on the eventual rise in oil prices above $35 per barrel, the price point at which most European oil majors will reach stable profitability.

RDS remains healthy in terms of its balance sheet and has a competent CEO and management team to guide it through these uncertain times. The next quarter will undoubtedly be a blood bath in terms of cash flow, but measures taken this quarter should have a limited but positive impact.

History doesn't repeat itself but it does rhyme, and the cyclical nature of the industry should allow oil prices to recover greatly from current levels, however, the time frame for this is up for speculation. I remain confident in RDS long term and believe we will see it rise back, as it has done countless times before in its long history.

To get real-time updates on my latest articles, follow me right here on Seeking Alpha.

Analyst’s Disclosure: I am/we are long RDS.B. 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.

Comments

[Uncommon Wisdom]

There is no like button for this article, so this is my "Like".

It's funny to me how most RDS analyse like this one don't even mention Shell's global convenience store network -- more retail locations than either Starbucks or McDonalds globally. I've discussed this in detail in other comments here in SA, so won't repeat my detailed comments here. Investors consider this: It takes 30 - 60 minutes to charge an EV. When consumers charge their EV in the future, Shell has an opportunity to sell food, beverages, snacks, and other items to that captive consumer.

[Retired Fernando]

By talking with a shell gas station dealer, I learned that RDS gets no profit from the convenience store.There is an agreement between a major department or grocery store (eg Carrefour) and the profit is for the distributor and the dealer. That was some time ago, I am not sure if it has changed.
BTW, I think you are very optimistic with your estimation (It takes 30 - 60 minutes to charge an EV). That is if you are the first on line. If there are a couple of cars in front of you, it could be a couple of hours waiting. Dealers may enter into an additional agreement with some restaurant chain to serve lunches.

[Peter Peeters - old]

Fernando Soriano
The profit dealing is from country to country different. It depends also who the owner is of the gas station. One thing you can be sure every petrol company including Shell earns good money with the convenience store. To give you an idea, in several european countries including Germany the convenience assortment, food and non food, no oil/ gas assortment does bring more profit as the gasoline and diesel assortment.

[CapVandal]

They don't seem to have a network of US C-Stores.
www.cspdailynews.com/...

[deva33]

www.youtube.com/...
M.Moore against Green energy

[Karl Ahlstedt]

Looks interesting, I will give it a watch, thanks for posting @deva33

[Tuco's Child]

The CEO is a Greenwash Political Animal.

Everything we touch and use in the modern world is based on fossil fuel oxidation (burning to release energy that we use), from the moment you open your eyes in the general hospital to bye bye time.

Clean nuclear to produce electricity for direct consumption and to electrolyze water and produce hydrogen would be good, but people are freaked out about nuclear which is actually quite safe now. Just don't build back-up generators below grade where they can be drowned by a tidal wave (Fukashima).

[User 50399071]

@Tuco's Child

Shell will make a boat load of money on Oil and Gas when things come back. People are acting like they are ditching Oil and Gas just because they didn't want to borrow billions to pay the dividend and that's just nonsense. They did everything they could to not cut it over the last decade, including issuing scrip shares. Easy double to 60/share in 6-18 months.

[deva33]

great comment pls check here about the NPP new types

The existing solar filling station remained unused because the sun simply does not shine at night, so the manager responsible said succinctly.
www.pi-news.net/...

upper right side pull down menue , languages Hebrew etc.

[Retired Fernando]

@deva33, thank you for the link. Excellent article. I concur every one should read it. Any way it can be submitted to vB?

[Blue Blood]

Shell can invest in utilities to fund development in tropical realms where it has assets. In Trinidad gas provides electricity to a state company, one of 50 assets which the state can divest to raise revenue for food production, homes, education, health and other needs. Gas is wasted on uinethical tobacco which can be divested to invest in bamboo to conserve water, sequester carbon and supply materials. Sugarcane ethanol can be boosted for fuel, sanitisers and preservatrive instead of rum, the cause of accidents and crime. Hold Shell forever.

[learnmoney]

Shell is a gas company which was not highlighted and to make hydrogen you need gas......just an example as well as no mention as to what happens when the world has no gas and oil...........what then??????

[Peter Peeters - old]

As long as the price structure in the oil and gas market is a political decision this market remains extremely volatile.

[Retired Fernando]

I would agree with you, but in electricity, charcoal, renewables,.. any kind of power, prices are political decisions (from high taxes to juicy subventions) not real market rules. I would prefer to turn the word volatile into unpredictable.

[Peter Peeters - old]

Fernando Soriano. Yes, I think you are right, in fact they are unpredictable.

[Tuco's Child]

Hydrogen, solar, and all renewables are based on and rooted in fossil fuel consumption and oxidation.

Shell and the CEO conveniently do not discuss this. A constant greenwash.

[ureal]

The problem with alternatives is they don't scale.

[martyr1777]

@ureal

Oh?

BEP ~$50 in purely renewable assests, they are extremely profitable and growing.

You were saying?

[ureal]

@martyr1777 I did not say green companies are not profitable. I said they don't scale, meaning you cant run big cities on renewables. I live on the East Coast of US, 18 million people. You can't do it with renewables. Hydro does a lot, the rest is fantasy. It does not work.

[1Horse]

wind and solar currently accounts for about 1% of the world's energy mix. And is not really scalable without causing vast environmental damage.
So - we need to stop calling these things "green".

[Person152352]

I like how the author posted a bunch of pretty pictures talking about decarbonization as if it's magical and inevitable without any significant damage to the environment. The way it might be is inevitable is through a real technological breakthrough or by government diktat which is the scary one and the one RDS is pandering too.

[Retired Fernando]

Mr. van Beruden A competent leader for Shell? He does not believe in the future of Shell as an oil major. He want to transform Shell into a green utility. A Green utility!, just wait until government subsidies end. He should be kicked out from Shell at once. He would be much better as the head of a green NGO (or enter politics in the EU, which is about the same).

[Veritas1010]

Buying now, first bite, sure a company transitioning to greener energy, fine.

However a faithful buy, hold accumulator (a.k.a., myself) a debacle.

I sold because my money needs to work harder, i am shifting more money (eventually) to renewables: Neste (NTOIY), Ørsted (DNNGY), ENEL (ENLAY), others that I was invested formerly I may return to p:NPIFF, AQN, VWDRY. My point is Shell is still encumbered by its hydrocarbon investments. Even NG/LNG is viewed as a pariah by green purists.

I also sold as it looks like other oil and gas majors can find as a less draconian way to deal with challenges of this nature besides slashing the investor up one way and down another: examples to date: XOM, BP, Repsol (REPYY), GALP (GLPEY).

disc.: long NTOIY, DNNGY, ENLAY, XOM, REPPY, GLEP.

[rf4]

can anyone even name companies that are making meaningful profits from solar, wind, renewables, utilities? best in class in the wrong thing is not best in class. add the debt burden and you have a company that has lost its focus and is trying to placate "greenies". the dividend cut was the last straw for the previous faithful. green tech is the energy of the future, and it always will be.

[teller12]

I'm confused. You correctly point out that renewables are a financial bust but then say green tech the way of the future. Which is it?

[1Horse]

That was sarcasm I believe! Meaning that its always in the future - ie. never in the present.

[martyr1777]

BEP, TERP.. look them up.

[GabsterX]

Discount rate in the DCF of 1%? I'd ask for at least 7 to 8% RR given the sector risk.

[retired358]

Author: please explain how you calculate that the return to shareholders has been good...it has centainly been much less than the dividend for long term holders.

Also disagree with you that shareholders should not be disappointed with the dividend cut....in view of the fact that they were told by management just a few months ago that the dividends would be raised and a few weeks ago that it was sustainable. Yes, they were unprepared for events...but, at the very least, they should have temporarily reduced or even suspended the dividend until conditions improved...but the reset was uncalled for and an inappropriate disservice to shareholders for whom they work. All in my view...

[Karl Ahlstedt]

Hi @retired358, I'd recommend you read www.ft.com/... to see how well Shell has performed historically.

As to dividends, you can still get them via selling a few shares. Its a case of retained value vs paid out value, and those who want more value paid out are welcome to dilute their position to offset any cut, though I dare say now would not be an ideal time to do so.

[retired358]

Karl. Could not open your url, but as a shareholder since 1970, I can certainly calculate my return. As an overview, one only needs to know that in 1997, the last time there was a share split, the stock reached 67. It is now near 30 as you well know. The dividend has averaged (basis a share price of about 60), approx 4% over the 20 plus years. So, total return to shareholders, basis a loss of about 50% in share value, has been very poor (certainly well less than the dividend and much to close to zero on a PV basis). Do you think otherwise. If so, please explain.

[topluso]

In the article "However, long-term prices will undoubtedly rise well above $35 and hit $60 globally at some point within the next ten years" Hahaha really? This is as reckless and pointless prediction as I've seen here.

[JayPar]

I don't think it will take 10 years before oil reaches $60 a barrel again. $60 a barrel is pretty much a reasonably balanced price where it is not overbearing for the consumer and the oil companies can profit and invest.

[finndog]

Brent is over 30 already.

[Karl Ahlstedt]

Hi @topluso, happy to eat my hat on this if it proves to be wrong. Appreciate your engagement!

[User 50399071]

What percentage of RDS is windmills, etc? I think it's tiny, so not sure why everyone is acting like they are a Windmill company now or even headed that way anytime soon.

[teller12]

People are determined to force this issue in order to destroy western power by shackling us all to a windmill and a solar panel.

[Tuco's Child]

Good point.

The environmental destruction and carbon oxidation to create wind power is unsustainable.

If you care about birds, they are a real disaster as well.

[1Horse]

Agree that in the long term oil will be much higher - probably triple digits after 2022. But is RDS the way to play it? Dividends are gone. They are more about lng ( highly dependent on China growth) , and have gone in with both feet into the "green" stuff - windfarms and such - with questionable economics - mainly work as long as the political winds are favorable, and these things are subsidized by the central banks .
The Canadian oil companies seem much better to me . Or even mid-sized producers in the US - like a Murphy .

Shell needs to explain why anyone should invest in them.

[Nicklaas]

A very comprehensive and well-argued piece, Mr Ahlstedt.Thanks for sharing your thoughts.

Always good to look at dis-confirmatory evidence given that I just sold my (small) RDS position.

Basically I had never been really happy with their returns on equity or capital for many yrs. Granted this is tricky in a cyclical industry with lots of price volatilty hitting after you have committed capital.
But still: their ROE is ±6%, CNQ = 9.5% (data from FT.com) and even utility National Grid manages 7.5.%. OK, maybe their utility strategy will be an improvement.
Funny: British Gas was split in an upstream co that was taken over by RDS a few yrs ago and what is now Centrica (the distribution networks, retail side -- widely seen as a basket case afte yrs of malfunction). Now RDS moves into the utility space... Why should it work out now?

RDS is in an extra tight spot here as they are heavily invested in LNG trains -- $ 12 - 20 B capex a piece. You think you sold your stuff / fixed your pricing for yrs. Then a lot changes against you.
Bad luck? Yes. But also a risky bet right from the start. No black Swan.

I did not do the math in detail , but w hindsight and given current prices the $ 50 B or so gas takeover a few yrs ago must look awfully capital destructive. Asked in the 1Q analyst meeting, the CEO waffled on this....

They just more or less exited shale - another costly 'unlucky' bet.

You yourself note their ill timed / expensive buy-backs. Bad luck? If you want to do that why not slash the dividend first, then buy back at a discount?

Reserves < 8 yrs. Far below peers and sinking. Abysmal reserve replacement ratio for yrs. Good if you believe those hydrocarbons are stranded assets anyway. But can anyone claim that with a straight face for a time horizon of 8 yrs?
If not they have underinvested in the upstream for yrs.

So in sum: Are they really a good steward of capital, have they earned trust, as the CEO claimed (again in the 1Q analyst meeting)?

Well, I am happy I am out for now. If I want renewable energy I can get that via BRKB at a ROE > 20% and as part of a much de-risked portfolio.

If I want oil / gas BP is a lot simpler and has (I think) better growth prospects and better transformed the company (they also do some post - carbon fig leafs...) and if want someone who really seems to sweat their assets it would be CNQ.

I will reconsider RDS at around 600p (should they get there, they were in the 800s in March)
I do like their refineries, chemicals, downstream footprint and also their trading.

Regards

NIcklaas

[User 50399071]

@Nicklaas

I always find it funny how people are so negative on a company AFTER they sold their shares. Let's talk about XOM......they are a HORRIBLY run company. Shell's a great company. Good luck to you.

[correct way to invest]

Exxon is the daddy shell fell short again

[Karl Ahlstedt]

@Nicklaas and I appreciate your own extensive comment here, interesting reading, thanks for posting.

[User 50399071]

I'm convinced that the straw that broke the camel's back was the Saudi Arabia Wealth Fund that bought a ton of Shell shares in March. Shell HAD to be irate that Saudi was going to buy there stock at a 15-19% dividend Yield and hold it forever.

[Nicklaas]

An interesting angle. N

[Karl Ahlstedt]

Heh, this made me chuckle, who knows! @Dead Broke

[smurf]

Panic sellers. Then they'll jump back in when these oil stocks are 20 points higher. I think that's sell low, buy higher?

[User 50399071]

@smurf

What is your take on Shell's renewable push? Are they moving too soon or is the move they are making right now not as massive and overblown among the naysayers? My only concern with Shell is lower revenue and margins going forward.

[martyr1777]

They are way behind the curve on renewables. There are renewable pure plays with billions in functioning power assets that are profitable and successful.

Take a look at BEP, Shell will not be able to catch up to them.

[User 50399071]

@martyr1777

I'm not wanting them to catch them. I'm wanting them to ride the Oil train for as long as it's profitable.

[dmau3]

Well written, well thought out. Thanks.

[Karl Ahlstedt]

Thank you for the kind words @dmau3.