As the old saying goes, anything that can go wrong probably will, and in the case of integrated energy giant, Royal Dutch Shell's (NYSE: RDS-B) most-recent quarter, that's what happened. Shares got hit hard after the company released disappointing earnings, and a slew of troubling factors encountered in the quarter may have investors wondering what else could go wrong.
At the same time, Royal Dutch Shell is an industry leader with a hefty dividend and a long track record of success. Therefore, the question seems to be: Should investors give it the benefit of the doubt?
The Murphy's Law quarter
In all, Royal Dutch Shell posted profit that fell by a third year over year. There was no shortage of culprits for the company's shortfall. Specifically, Royal Dutch Shell was negatively affected by extremely weak refining margins, as well as an ongoing security situation in Nigeria that is severely disrupting its operations.
Royal Dutch Shell isn't the only integrated major suffering from the awful environment for refining. U.S. major Chevron (CVX +0.08%) recently posted a 6% drop in quarterly net income, thanks to its downstream operations. These operations house refining activities, and its earnings declined 55% year over year. Thankfully, Chevron's upstream businesses are doing fairly well, which is dampening the negative effects of refining.
Meanwhile, Royal Dutch Shell's disturbing situation in Nigeria, plagued by oil theft and civil uprisings, will hopefully not be a long-term issue, which is why I'm inclined to believe the company's problems can be fixed. That being said, the seemingly constant security challenges presented by the region make me slightly nervous about other energy companies that have invested heavily in African oil production.
Italian energy giant Eni (E +1.49%), for instance, has plowed heavily into Libya, and its chief executive believes Libya to be the next oil-producing 'paradise'. While that may be true, it's difficult to outright ignore the obvious geopolitical risk, and the fact that Eni has more operations in Libya than any other oil driller in the world. In fact, more than half of Eni's total hydrocarbon production, over the first half of 2013, came from Africa. As a result, those considering European-based energy majors would be wise to stick with Royal Dutch Shell.
Why brighter days probably lie ahead
Despite the company's near-term struggles, Royal Dutch Shell remains optimistic about the company's long-term prospects. This is driven by the fact that a great deal of new projects will come on-line in 2014, which should boost cash flow, and profits in the years ahead. Specifically, Royal Dutch Shell has engaged several new projects in the last few months which should pay off in short order, including deep water, integrated gas, and new fields in Iraq that the company considers key to its long-term strategy.
In addition, Royal Dutch Shell has announced it will place strict emphasis on the most promising opportunities. The company plans to reduce net spending next year, while simultaneously increasing the pace of non-critical asset sales, with the goal of focusing on only the best opportunities.
Moreover, Royal Dutch Shell's results from a longer-term perspective aren't nearly as bad as the most-recent quarter would imply. The company's earnings fell 16% through the first nine months of the year, that's half of its third-quarter decline. Plus, investors are receiving the benefit of an industry-leading dividend, which stands at about 5.3%. That means you're being paid well to wait, and the fact that Royal Dutch Shell boosted its dividend earlier this year signals that management is entirely confident in the company's future.
