Here’s the Problem with Royal Dutch Shell plc
The Royal Dutch Shell plc (ADR) (NYSE:RDS-A) stock is not trading at the lowest point of the year, which is something it achieved on September 28th at about $45.80 per share, but it’s not too far off from that dubious price point. Shell suffered a net loss of $7.4 billion in the third quarter of 2015, a loss that is unprecedented in the last sixteen years and confirms once more the difficult economic situation affecting not just itself but the oil and gas in world as a whole. Indeed, RDS-A stock has plenty more room to go–downward.
Shell plc Loses 5% of its Market Value in the Quarter
The losses are equivalent to five percent of Shell’s market value, clashing loudly with the sound of Shell’s $5.9 billion profits achieved during the same period last year. Revenues in the third quarter went from last year’s $108 billion to $68.0 billion.
Shell stock has attributed its losses to the cancellation of its Alaskan Arctic project to exploit hydrocarbons in Alaska and oil sands in Canada (Carmon Creek). These cuts caused nearly $5.0 billion to go up in smoke, to which the company added $3.7 billion of write-downs linked to the worsening of the long-term fuel prices outlook.
Nevertheless, Shell cannot simply attribute its losses to poor economic conditions for oil; after all, BP p.l.c. (ADR) (NYSE:BP) has fared much better, stabilizing at a $35.00 price level. BP is still recovering from the ecological disaster in the Gulf of Mexico in 2010, but it expects few shocks ahead, having already absorbed the implications of lower crude prices. BP stock actually beat analysts’ estimates with net income of $1.8 billion (expectations were for $1.2 billion) attributable to higher profits in the refining sector.
Is BP a Better Investment than Shell?
Another reason why BP is better positioned than Shell is that the company has already set the course to manage the current oil price situation, striving to find new fields of exploration, new technology, and new alliances. The recent industrial alliance between BP and China’s China National Petroleum Corporation (CNPC) has beaten its competitors–especially Shell–to gain from the boom in the development of shale gas and unconventional oil deposits in China.
It is unclear when the situation will stabilize; Shell and other oil companies have to confront a period of great volatility. Shell is still hoping to draw big profits from its acquisition of BG Group plc (OTC:BRGYY) but that deal still needs to get over significant regulatory hurdles in Australia and China.
Shell’s bearish outlook can be taken to mean that its primary answer to the poor quarterly performance was biased toward staff cuts. Earlier this year there was talk of 6,500 layoffs, but yesterday many more thousands were added to the list. Shell cut investment capital by 20%, setting the ceiling to $30.0 billion. Shell will continue to pursue a policy of cost containment.
Shell has now ceased any further exploration offshore in Alaska for the near future. Shell held 100% of the 275 concessions in the outer continental shelf blocks in the Chukchi Sea. Economically, however, the thud of heavy financial loss echoed throughout the Arctic as the company invested about $7.0 billion in its arctic adventure, wrought with incidents and finding nominally huge reserves, which proved scarce and difficult to extract. Shell has bet heavily on drilling in the Arctic and today has remedied a resounding defeat, both in terms of cost and public reputation.