Why Investing in Royal Dutch Shell plc Requires Patience

Royal Dutch Shell's interim fourth-quarter updated contained bad news across the board. Investors need to brace themselves for when Shell reports later this month.

Jan 27, 2014 at 1:17PM

Big Oil has its fair share of complications these days, spanning from weak refining margins to severe security challenges across the world. No company is suffering more from these issues than Royal Dutch Shell (NYSE:RDS-B), which released an interim fourth-quarter update that should give investors pause.

That's why Foolish investors need to exercise a good deal of patience when it comes to Royal Dutch Shell. Its near-term results are likely to be sluggish at best, and all indications are it will take some time for Shell to sort out its problems.

Lower profits on the horizon
Royal Dutch Shell will report its fourth-quarter and full-year results on January 30. Meanwhile, the company released an interim update, to give investors fair warning that the results won't be pretty. To use Shell's own words, "fourth quarter 2013 figures are expected to be significantly lower than recent levels of profitability, considering current oil and gas prices and the downstream oil products industry environment."

In all, Royal Dutch Shell expects earnings of $2.2 billion and $16.8 billion in its fourth quarter and full fiscal 2013, respectively. This compares very poorly to the same results in 2012. Shell earned $7.3 billion in core earnings in the fourth quarter last year and $27.2 billion in 2012.

It's not entirely difficult to see the reasons for Royal Dutch Shell's struggles. It's seeing weakness across nearly all of its businesses. First, the price of Brent crude, the international equivalent to West Texas Intermediate crude, recently fell to a two-month low on resumed Libyan supply. In addition, Shell encountered higher exploration expenses, higher maintenance requirements, and lower volumes.

On the downstream side, earnings continue to be affected primarily by weak refining conditions, especially in Asia-Pacific and Europe. Chemicals earnings are expected to increase, but this will be more than offset by broader refining woes.

This isn't necessarily a surprise, as refiners have languished for most of 2013. Major refiner Valero Energy (NYSE:VLO) reported a 53% drop in third-quarter net income, from $674 million in 2012 to $312 million in 2013. Collapsing refining profitability is due to shrinking margins, and it's likely Shell will report similar conditions in its own refining unit.

Add it all up, and Shell projects worsening results in each of its upstream, downstream, and corporate activities segments.

Shell follows a familiar trend
The issues facing Royal Dutch Shell are rippling through the entire industry. Fellow integrated major Chevron (NYSE:CVX) expects its fourth-quarter results to be similar to those from the third quarter. That's not saying a whole lot in Chevron's favor, since its third-quarter net income fell 5% versus the same period the year prior. At the same time, Chevron is displaying far superior resilience compared to Shell.

What makes Shell's situation particularly worrisome is that it's suffering much more severely than its rivals. Everything seems to be going against Shell, but at the same time, there's no guarantee the situation will improve significantly in the near future. For example, the company is under the weight of a serious security challenge in Nigeria that will probably exist well into 2014.

Can management turn things around?
Royal Dutch Shell management admitted its own disappointment in the company's poor results over the course of the past year. In its fourth-quarter interim report, CEO Ben van Beurden stated: "Our 2013 performance was not what I expect from Shell. Our focus will be on improving Shell's financial results, achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery."

Investors will have to decide if they believe management will be successful in engineering a turnaround. To the company's credit, Shell pays a dividend that places it near the top of its industry. Its dividend might be the only thing investors can count on over the next year, as significant stock price appreciation might be too much to ask given Shell's multitude of problems.

OPEC's nightmare is a dream come true for investors
Investing in Shell requires patience. But what if you could invest in 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!


Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers