Please ensure Javascript is enabled for purposes of website accessibility

Find Out Why Royal Dutch Shell's Fire Sale May be Cause for Concern

By Bob Ciura – Feb 5, 2014 at 9:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Royal Dutch Shell plans to sell off several billion dollars worth of assets over the next two years. Should investors be worried?

The last year was a tough one for integrated oil majors. Thinning refining margins put a serious dent in downstream earnings, and upstream profitability failed to impress despite cooperative energy prices. As a result, it's not entirely surprising to see members of Big Oil such as BP (BP 1.76%) sell off non-critical assets.

Even independent exploration and production major ConocoPhillips (COP -0.11%), which isn't nearly as integrated as its peers after spinning off its downstream and midstream business, got in on the asset sale game last year.

However, both BP's and ConocoPhillips' asset sales look downright modest in comparison to the outright fire sale Royal Dutch Shell (RDS.B) will soon embark on. Royal Dutch Shell unloaded billions last year, with even greater amounts to be sold off over the next two years. That's why investors may have legitimate cause for concern about the fate of Shell's future growth trajectory.

Addition by subtraction?
BP notified investors of its intention to divest assets deemed non-critical to its future. Of course, BP has plenty of reason to do this. It's still battling the financial damage caused by the Gulf of Mexico oil spill. In preparation, BP has shed assets to buffer its balance sheet against likely further penalties resulting from its ongoing civil trial. Going forward, BP plans to divest approximately $2 billion to $3 billion per year, with the aim of optimizing its portfolio.

Even ConocoPhillips is streamlining itself, which it doesn't necessarily have to do since it navigated 2013 much better than its integrated rivals. Thanks to its status as an exploration and production pure-play, Conoco wasn't hit by the horrible environment for refining activities and grew its adjusted earnings by 6% last year.

Nevertheless, Conoco disposed $10.2 billion worth of assets last year. Its reasoning was fairly straightforward: Conoco sought to exit riskier international geographies, such as Algeria and Kashagan, to focus on more promising U.S.-based plays. This makes sense, of course, since its combined operations in the Eagle Ford, Bakken, and Permian Basin domestic plays increased production by 31% in the fourth quarter.

Royal Dutch Shell's divestment plans top them both
Royal Dutch Shell's divestment plans stand far above those of its peers. In all, Shell intends to unload $15 billion worth of assets over the next two years. In addition, Shell is significantly paring back its capital spending plans, including the recent decision to suspend drilling in the Arctic off the coast of Alaska.

These initiatives are what Shell management refers to as the "hard portfolio choices" necessary in light of its poor underlying performance in 2013. This stands to reason, since Shell's core net earnings fell by 23% last year.

To boost investor morale, Shell management points to a number of key start-ups in 2014 that it hopes will get cash flow going in the right direction. These include the recently announced positive well test results in onshore Albania, where Shell owns a 75% interest. Shell also added significant acreage during the fourth quarter of 2013 in Australia and Greenland. The hope is that these new positions will compensate some of the lost production once its huge asset sales get under way.

Royal Dutch Shell may struggle to grow
To be fair, Royal Dutch Shell's capital discipline is admirable considering its struggles in 2013. Management fully expects the new Shell to be a streamlined, focused company that operates in a much more efficient manner. While this may very well materialize, it's hard to see how Shell will find enough avenues for growth once it divests $15 billion in assets over the next two years. Its new projects for the upcoming year are promising, but a lot will have to work out in Shell's favor for growth to get back on track in 2014.

Falling earnings can put dividends in danger. Stay safe with these 9

Bob Ciura owns shares of BP p.l.c. (ADR). The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

BP Stock Quote
$35.93 (1.76%) $0.62
ConocoPhillips Stock Quote
$124.11 (-0.11%) $0.14
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.