How Royal Dutch Shell Will Soon Become a Major Player in Natural Gas

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

2013 was a difficult year for integrated major Royal Dutch Shell (NYSE: RDS-B  ) due to extremely challenging results in several of its key markets. Its downstream profitability was marred by crimped refining margins, and ongoing labor disputes caused severe supply disruptions in its Nigerian operations. Not surprisingly, profits suffered throughout the year.

This has left investors scrambling for any bit of news they can get their hands on that may foretell better conditions in the upcoming year. Thankfully, Royal Dutch Shell's burgeoning natural gas business may provide just the catalyst needed for higher profits in 2014.

An emerging global natural gas pioneer
Royal Dutch Shell has made a slew of natural gas investments in the past year. It's allocated billions of dollars to serve what is likely to be booming global demand in the near future. For starters, Shell recently acquired Repsol's (NASDAQOTH: REPYY  ) liquefied natural gas (LNG) portfolio for a tidy $4.1 billion in cash. The assets, which are located outside North America, will complement Royal Dutch Shell's already-impressive international natural gas presence.

This deal provides Royal Dutch Shell with natural gas volumes of more than 7 million tonnes per annum. In all, the company's LNG capacity will rise by 20% as a result. Moreover, the acquisition is expected to be accretive in the near term, since the portfolio is largely developed and will require only limited ongoing expenditures.

Royal Dutch Shell's purchase adds to the sizable international investment it's already made. This is primarily in the form of Australian natural gas production, through the Gorgon Project. The Gorgon Project will be one of the world's largest natural gas projects and the largest single resource development in Australia's history. Shell owns one-quarter of the project, with Chevron (NYSE: CVX  ) holding a 47% interest in the development. The Gorgon Project will result in a 15.6 million tonnes-per-annum LNG facility, and Chevron management believes the natural gas can be marketed as early as 2015.

The Gorgon joint venture represents a unique opportunity for all participants. It's situated perfectly, from a geographic standpoint, to serve the emerging markets, where natural gas demand is poised to skyrocket in the years ahead. Chevron estimates that natural gas consumption in the Asia-Pacific region will almost double between 2005 and 2020. LNG fits perfectly into this equation, as the developed LNG markets of Japan, South Korea, and Taiwan are expected to represent most of the demand. Plus, underdeveloped natural gas markets in China and other Asian nations should only boost the opportunity for profit.

This huge potential couldn't come at a better time for Royal Dutch Shell, which struggled throughout 2013. Its core earnings fell 26% through the first nine months of the fiscal year. The company squarely placed blame on weak refining margins and an ongoing security situation in Nigeria, in which its production fell due to oil theft and civil uprisings.

Royal Dutch Shell: A natural gas leader in the making
Due to its hefty investments in natural gas over the past year, Royal Dutch Shell is on the verge of becoming a major player in the international natural gas industry. Natural gas is booming across the globe, thanks to soaring demand, and increasing production. This means natural gas is marketable to a degree never seen before.

Royal Dutch Shell's natural gas presence is likely to pay off sooner rather than later, which couldn't come at a more opportune time for the company. It suffered mightily last year due to falling refining profitability and supply disruptions in Nigeria, one of its major oil-producting geographies. Shell makes a serious commitment to providing an industry-leading dividend to shareholders, and it's critical that the company generates enough profit going forward to support such a lofty payout. It appears the company will do just that, thanks in large part to its rapidly expanding natural gas business.

OPEC's nightmare or Buffett's dream?
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 (2)

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.

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: 2797979, ~/Articles/ArticleHandler.aspx, 8/30/2015 4:15:26 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...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

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

8/28/2015 4:01 PM
CVX $80.43 Up +2.79 +3.59%
Chevron CAPS Rating: ****
RDS-B $52.62 Up +0.66 +1.27%
Royal Dutch Shell CAPS Rating: ****
REPYY $14.78 Down -0.14 -0.94%
Repsol YPF, S.A. (… CAPS Rating: *