Time to Give Up on Royal Dutch Shell?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Royal Dutch Shell (NYSE: RDS-A  ) , Europe's largest oil company by market capitalization, reported sharply lower third-quarter profits this week. Let's take a closer look at why the company's profits fell and what investors can expect going forward.

Why Shell's profits fell
Shell's third-quarter net income came in at $4.5 billion, down 32% from the year-earlier quarter, against analyst expectations of more than $5 billion. Though the rest of the oil majors that have reported earnings so far also fared poorly, Shell's was one of the biggest year-over-year declines.

ExxonMobil (NYSE: XOM  ) , for instance, saw third-quarter earnings fall 18% to $7.87 billion, while Total (NYSE: TOT  ) and BP ( (NYSE: BP  ) reported year-over-year declines of nearly 20% and 26%, respectively.

Shell's profits fell due to a few important reasons, some of which were specific to the company and others that affected the entire industry. First was a 2% year-over-year decline in total oil and gas production, due largely to continuing challenges in Nigeria. During the quarter, a deteriorating security situation in the country and a blockade of Nigeria LNG reduced the company's profits by $300 million.

Perhaps the biggest contributor to Shell's poor quarterly performance was weakness in global refining margins -- an industry-wide phenomenon. Due to a contracting price differential between Brent crude and West Texas Intermediate crude, weak fuel demand in Europe, and maintenance activities at its refineries in Canada, Shell's downstream segment saw a massive 49% year-over-year decline in earnings, which came in at $892 million.

All the majors to issue earnings reports so far this season have cited the negative impact of global refining overcapacity and weak demand for fuel in the Western world, particularly in Europe, as the main reason behind sharply lower downstream earnings. For instance, Exxon saw its refining and marketing profit plunge 81% from a year earlier, while Total said downstream earnings fell 42% year over year.

Spending remains a concern
Compounding investors' concerns about Shell's disappointing quarterly performance is the fact that capital spending continues to rise. This year, the company is expected to spend a record $45 billion, about 50% more than it spent in 2012 and 12.5% more than it had previously indicated.

While 2013 spending was driven by a number of major acquisitions, including Shell's purchase of Repsol's LNG assets for $6.7 billion, net spending going forward is expected to be markedly lower. Shell is targeting capital expenditures of $130 billion from 2012 to 2015, meaning spending in 2014 and 2015 will have to total $55 billion if the company is to meet its target.

This should be achievable through continued asset sales, which have already commenced in full force this year. As part of a strategic review of operations in North America and Nigeria, Shell recently parted ways with poor-performing assets in the Eagle Ford and the Mississippi Lime and also put additional oil blocks in Nigeria up for sale.

Good news ahead
While Shell's third-quarter performance was disappointing by most measures, I think the company may have a brighter future. Next year, Shell plans to start up at least five new high-margin oil projects, including Mars-B and Cardamom in the Gulf of Mexico, which should boost 2015 cash flow by $4  billion.

Combined with future asset sales in the range of $10 billion-$15 billion, that could be enough to finance the company's massive capital spending program, as well as leave some surplus cash to be returned to shareholders through dividends and share repurchases. Furthermore, the company's leading position in global LNG should serve it extremely well over the longer term, given the highly cash-generative nature of these projects.

While Shell and the other oil majors struggle to grow production and earnings, one energy company continues to mint profits. Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2710558, ~/Articles/ArticleHandler.aspx, 9/27/2016 8:46:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 18,094.83 -166.62 0.00%
S&P 500 2,146.10 -18.59 0.00%
NASD 5,257.49 -48.26 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:01 PM
BP $33.68 Down -0.28 +0.00%
BP CAPS Rating: ****
RDS-A $47.47 Down -0.50 +0.00%
Royal Dutch Shell… CAPS Rating: ****
TOT $46.10 Down -0.43 +0.00%
Total CAPS Rating: ****
XOM $83.06 Down -0.39 +0.00%
ExxonMobil CAPS Rating: ****