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Royal Dutch Shell: a Bad News Buy

January 23, 2014 | About:

Company History

Royal Dutch Shell (RDS.A),(RDS.A) is a multinational integrated oil and gas company, incorporated in the UK and headquartered in the Netherlands. It was created by the merger of Royal Dutch Petroleum and UK Shell Transport & Trading. It's the largest company in the world, in terms of revenue, and one of the six oil and gas "supermajors." Shell is one of the world's refiners with refining capacity of 3.2 million barrels per day.

Business Operations

Shell operates in over 90 countries, produces about 3.1 million barrels of oil equivant per day and has 44,000 service stations around the world. Its operation includes exploration, production, refining, distribution and marketing, petrochemicals, power generations and trading. Shell also holds 50% of Raizen, a joint venture with Brazilian sugercane producer Cosan which is the third largest energy company by revenues a major ethanol producer. The company will miss its fourth quarter expectations by a wide margin. Shell's new CEO Ben Van Beurden said adjusted earnings for the fourth quarter will be around $2.9 billion verus anaylist expertations of $4.9 billion. Expectations to miss were caused by higher costs in exploration, refining and lower production in oil. This has led to Shell announcing a $15 billion divestment in non-core assets over the next two years. It has canceled a $20 billion gas to liquid plant in Louisiana last month and is selling its stake in an Australian natural gas project for $1.1 billion.

Leader In LNG

Shell produced 22 million tons of LNG in 2013, making it one of the largest LNG producers in the world. As this segment keeps growing Shell will make a lot of money down the road. 

Shell Compared to Other Oil & Gas Companies

Firm Market Cap P/E Price/Book Price/Cash Flow Return on Assets Return on Equity Return on Invested Capital Dividend Yield
Exxon Mobil 403B 12.9 2.5 9.2 13.50 28.03 25.62 2.5
Chevron 230B 9.8 1.6 6.7 11.83 20.30 18.68 3.2
BP 133B 6.3 1.2 7.0 3.90 10.08 6.74 4.5
Shell 203B 10.6 1.3 5.1 7.52 14.86 11.85 5.O
ENI 73B 8.7 1.1 6.4 5.51 13.58 3.01 4.9
Total 108B 10.9 1.4 5.0 6.37 15.17 9.93 4.3

Shell's value compared to other leading integrated oil and gas companies is reasonable based on its earnings, cash flow and its solid balance sheet. You are getting a company with a sold dividend yield of 5% good return on asset, equity and invested capital. It's not the cheapest in the group, but its valuable assets, buybacks, dividend increase and asset divestment of non-core assets make it a great investment. Its short-term problems don't hurt its earning value of its assets, or its ecomonic value as a long-term investment.

Shell's Valution

FYE 2012 2011 2010 2009
Revenue 481B 470B 368B 278B
Net Income 26.8B 31.2B 20.5B 12.5B
Cash 18.6B 11.3B 13.4B 9.8B
EPS 8.48 9.94 6.56 4.09
Dividends 2.91 2.86 2.98 3.06
Payout Ratio 34% 29% 45% 75%
Current Ratio 1.2 1.2 1.1 1.1
Tangible Book Value 59.71 52.65 46.43 42.82

I've estimated that Shell's fair value is $126 per share based on its earnings, cash flow from operations and growth in earnings, cash flow and book value. 

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