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 (OTC: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.